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ECB Exec: Sovereign Money Needs To Be Reinvented

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ECB Exec: Sovereign Money Needs To Be Reinvented 102
Fabio Panetta. Supply: ecb.europa.eu

Speech by Fabio Panetta, Member of the Govt Board of the European Central Financial institution (ECB), on the Deutsche Bundesbank convention on the “Way forward for Funds in Europe.” Frankfurt am Most important, 27 November 2020.

Retail funds play a elementary function in our day by day lives and for the financial system. Final 12 months, adults within the euro space made two funds per day on common.[1] The universe of retail transactions[2] amounted to 213 billion funds – two million each 5 minutes – with an estimated complete worth of [EUR] 164 trillion.[3]

As a part of its mission to advertise the sleek operation of the cost system, the Eurosystem has two predominant goals within the space of retail funds. The primary is to ensure that folks have entry to environment friendly cost options that meet their preferences. The second is to make sure that transactions stay protected, underpinning confidence in our forex and the functioning of our financial system.

Technological innovation signifies that the coverage implications of those goals are altering, and new alternatives and dangers are rising. In the present day I’ll current the Eurosystem’s response: a technique for empowering Europeans with environment friendly, inclusive and safe funds within the digital age. And I’ll argue that the upcoming revolution in funds requires us to face able to reinvent sovereign cash.

Comfort and security within the digital age

Funds have advanced considerably over time, however the important thing determinants of their success have remained basically unchanged. Folks need funds that provide comfort and security at a low value. Comfort requires funds to be simple to make use of, quick and extensively accepted, whereas security requires low threat from an financial, monetary and societal perspective.

The digital transformation is elevating the bar for comfort and security. With the expansion of e-commerce and linked life, persons are more and more demanding immediacy and seamless integration between funds and digital providers. On the identical time, they’re more and more involved about privateness, cybersecurity and reliability.

This wide selection of fascinating options creates scope for progressive cost options. At the moment, not one of the current options – money, playing cards, credit score transfers, direct debits and e-money – meet all of the required options directly. Persons are compelled to make use of a number of devices on the identical time. In-person transactions[4] are largely performed with money and playing cards.[5] Distant purchases are dominated by playing cards and e-payments.[6] And payments are usually paid utilizing direct debits and credit score transfers.[7]

The coronavirus (COVID-19) shock has accelerated the development in direction of digitalisation, resulting in a surge in on-line transactions and contactless funds in retailers. This development is more likely to persist as soon as the pandemic is over.[8] So we should ask ourselves whether or not the accessible technique of cost adequately meet the wants of customers within the digital age.

Money affords a safe and inclusive method of constructing in-person funds, however it’s not properly fitted to funds in a digital context, corresponding to in e-commerce. So it’s no shock that it’s getting used much less.[9] Cost playing cards, however, facilitate digital, contactless funds. However they don’t seem to be accepted all over the place. And the Europe-wide acceptance of playing cards issued below nationwide card schemes at the moment depends on agreements with worldwide card schemes. Because of this, folks largely use worldwide schemes for cross-border card funds, and the European marketplace for card funds is dominated by non-European schemes.

Typically, Europe is more and more counting on overseas suppliers, with a excessive diploma of market focus in some segments, corresponding to card transactions and on-line funds.[10]

We should always not let this reliance flip into dependence. Dependence on overseas suppliers and extreme market focus would hurt competitors, limiting the selection for customers and exposing them to non-competitive pricing. It may scale back the resilience of the cost system and weaken the power of European authorities to train controls.

We should make sure that the cost market stays open to competitors, together with from European suppliers and know-how.

The inflow of know-how companies

Fintech firms have sparked the newest wave of innovation, accelerating the evolution of the cost system.[11] Lots of them have adopted data-driven enterprise fashions, the place cost providers are offered freed from cost in change for private knowledge. Quite a few banks are increasing their vary of digital providers by coming into into agreements with fintechs; in some instances, integration is achieved when a financial institution acquires a fintech agency.

The worldwide tech giants – the so-called large techs – are aiming for a revolution within the funds panorama, and characterize a risk to conventional intermediation.[12] These companies can use data-driven fashions on a completely new scale by leveraging their massive buyer base, real-time knowledge and management of essential infrastructures for commerce and financial exercise – from on-line marketplaces to social media and cellular applied sciences. They will use these benefits, their monetary power and their international footprint to offer new cost options and increase in each home and cross-border transactions. This could provide them an excellent stronger base to additional increase the vary of their monetary actions, together with lending, as their superior capability to gather and analyse massive volumes of information provides them an info benefit.

If not correctly regulated, large techs could pose appreciable dangers from an financial and social perspective they usually could limit, quite than increase, client selection.

They will worsen the chance of non-public info being misused for industrial or different functions, jeopardising privateness and competitors. And so they could make the European cost market depending on applied sciences designed and ruled elsewhere, exacerbating its vulnerability to exterior disruption corresponding to cyberattacks.

The massive techs may contribute to a speedy take-up, each domestically and throughout borders, of so-called stablecoins.[13] As I’ve argued beforehand[14], stablecoins elevate issues with regard to client safety and monetary stability. In actual fact, the issuer of a stablecoin can not assure the understanding of the worth of the cost instrument it affords to customers. Such a assure can solely be offered by the central financial institution.

Furthermore, not like financial institution deposits, stablecoins don’t profit from deposit assure schemes, their holders can not depend on the diploma of scrutiny that’s now the norm in banking supervision, and the issuers wouldn’t have entry to central financial institution standing services. Because of this, stablecoin customers are more likely to bear greater credit score, market and liquidity dangers, and the stablecoins themselves are weak to runs[15], with doubtlessly systemic implications[16].

These dangers could possibly be mitigated if the stablecoin issuer have been in a position to make investments its reserve belongings[17] within the type of risk-free deposits on the central financial institution, as this is able to eradicate the funding dangers that in the end fall on the shoulders of stablecoin holders.[18]

This could not be acceptable, nevertheless, as it will be tantamount to outsourcing the supply of central financial institution cash. It may endanger financial sovereignty if, in consequence, personal cash – the stablecoin – have been to largely displace sovereign cash as a method of cost. Money would then be lowered to a “membership good” supplied in return for the cost of a payment or membership of a platform.[19]

We should always safeguard the function of sovereign cash, a public good that central banks have been managing for hundreds of years within the public curiosity and that ought to be accessible to all residents to fulfill their want for security.

Financial sovereignty is also threatened if overseas central financial institution digital currencies turned extensively used within the euro space, with implications for worldwide financial spillovers.[20]

These dangers should not imminent. We should nonetheless be alert to potential non-linear developments that would endanger monetary stability and financial and financial sovereignty. As we purpose to boost the effectivity of European funds, we due to this fact should be ready to rethink the character and the function of sovereign cash.

The Eurosystem coverage response

The Eurosystem is implementing a complete coverage to make sure that residents’ cost wants are met, whereas safeguarding the integrity of the cost system and monetary stability. Our coverage relies on interconnected parts addressing all the cost worth chain.

First, we have now enhanced our retail funds technique, with a view to foster aggressive and progressive funds with a robust European presence. We’re actively selling pan-European initiatives that provide safe, low-cost and extensively accepted cost options.[21]

We’re supporting entry to financial institution accounts by non-bank suppliers, in order that they’ll increase the vary of cost initiation providers they provide. Yesterday the Euro Retail Funds Board, chaired by the ECB, launched a piece stream to facilitate this entry. We’re working to make the European e-identity and e-signature frameworks higher fitted to funds and the monetary sector extra broadly.

Our retail funds technique additionally builds on the promotion of instantaneous funds, which make funds instantly accessible to recipients. We’ve created a strong foundation for immediate funds, with generally agreed guidelines and highly effective infrastructures, together with the TARGET Prompt Cost Settlement (TIPS) service, operated by the Eurosystem. Because of the measures we have now taken in current months, all euro instantaneous cost suppliers and infrastructures can have entry to TIPS by the top of 2021.

Second, we’re adapting our regulatory and oversight framework to the quick tempo of economic and technological innovation. We’ve reviewed our Regulation on oversight necessities for systemically necessary cost methods[22], introducing a extra forward-looking strategy to establish cost methods which might be systemically necessary. And at present we’re launching a public session on the brand new regulation, which can then grow to be operational by mid-2021.

We’re additionally finishing the general public session on our new framework for digital cost devices, schemes and preparations, the so-called PISA framework. PISA extends our oversight[23] to digital cost tokens[24], together with stablecoins, and to cost preparations offering functionalities to finish customers of digital cost devices[25]. Because of this, know-how suppliers can grow to be topic to oversight.

As a part of our complete coverage, we’re working to safeguard the function of sovereign cash within the digital period: we wish to be able to introduce a digital euro, if wanted.

A digital euro would mix the effectivity of a digital cost instrument with the protection of central financial institution cash. It might complement money, not change it. Collectively, these two varieties of cash could be accessible to all, providing better selection and entry to easy, costless methods of paying.

We’ve began a public session to hunt suggestions from folks throughout Europe and acquire a greater understanding of their wants. Will probably be accomplished in January, and the outcomes can be printed as soon as they’ve been analysed.

A digital euro would should be fastidiously designed, with a view to improve privateness in digital funds[26], respect the principles on countering unlawful actions and keep away from interference with central financial institution insurance policies, in the beginning financial coverage and monetary stability.

Particularly, a digital euro ought to be a method of cost, not a type of funding that competes with different monetary devices. This could require limiting the holdings of particular person customers[27] and imply that, not like stablecoin issuers, the issuer of the digital euro – the ECB – wouldn’t purpose to amass deposits.

A digital euro would help the modernisation of the monetary sector and the broader financial system. It might be designed to be interoperable with personal cost options and would thus characterize the “uncooked materials” that supervised intermediaries may use to supply pan-European, front-end cost options.

A digital euro would additionally generate synergies with different parts of our technique, facilitating the digitalisation of data change in funds by e-invoices, e-receipts, e-identity and e-signature. And in making it simpler for intermediaries to offer added worth and superior technological options at decrease value, it will give rise to merchandise that would compete with these of the large techs, thereby benefitting finish customers.

The ECB and the nationwide central banks have began preliminary experimentation by 4 work streams. First, we’ll check the compatibility between a digital euro and current central financial institution settlement providers (corresponding to TIPS).[28] Second, we’ll discover the interconnection between decentralised applied sciences, corresponding to distributed ledgers, and centralised methods. Third, we’ll examine using payment-dedicated blockchains with digital id. And fourth, we’ll assess the functionalities of {hardware} gadgets that would allow offline transactions, guaranteeing privateness.[29]

We are going to take the required time to discover all points of various choices: whether or not they’re technically possible, whether or not they adjust to the ideas and coverage goals of the Eurosystem, and whether or not they fulfill the wants of potential customers.


Let me conclude. The digital transformation is triggering a revolution within the monetary sector, which can carry innovation but in addition dangers. Particularly, large techs and stablecoins may disrupt the European monetary system. And whereas they might provide handy and environment friendly cost options, in addition they threat endangering competitors, privateness, monetary stability and even financial sovereignty.

Our insurance policies present a forceful coverage response to the digital shock. We wish to create the circumstances for a resilient, progressive, various and aggressive funds panorama that may higher serve the evolving wants of European folks and companies. We’re selling protected, pan-European instantaneous funds.

What’s at stake is nothing in need of the way forward for cash. As personal cash goes digital, sovereign cash additionally must be reinvented. This requires central financial institution cash to stay accessible below all circumstances – within the type of money, after all, but in addition doubtlessly as a digital euro.

We wish to allow folks to decide on their most popular method of paying with out having to compromise on their expectations of quick, safe, inclusive and seamless funds. That is our purpose at present, and it’ll stay our purpose sooner or later.


[1]The info check with European residents aged 18 or over and embrace point-of-sale, person-to-person and distant transactions, in addition to invoice funds. See ECB (2020), Research on the cost attitudes of customers within the euro space (SPACE), forthcoming.
[2]Whether or not they’re made on the bodily level of sale or on-line and whether or not they’re made by personal people, companies or the general public sector.
[3]Supply: ECB workers estimates based mostly on funds statistics (ECB Statistical Knowledge Warehouse) and findings from ECB (2020), ibid.
[4]Funds on the bodily level of sale and person-to-person funds.
[5]As of 2019, money is utilized by euro space adults for 73% of in-person transactions when it comes to quantity and 48% when it comes to worth. Card funds account for a lot of the the rest: 24% when it comes to quantity and 41% when it comes to worth. Supply: ECB (2020), op. cit.
[6]Examples of e-payment suppliers embrace PayPal, Sofort and Afterpay. Card funds account for about half of all distant purchases, and e-payments for about one-quarter, when it comes to each quantity and worth. Supply: ECB (2020), ibid.
[7]Direct debits account for 41% of invoice funds when it comes to quantity and 37% when it comes to worth. Credit score transfers account for 20% of invoice funds when it comes to quantity and 29% when it comes to worth. Supply: ECB (2020), ibid.
[8]About 41% of respondents to a current survey say they’ve lowered their use of money. The overwhelming majority of them anticipate to proceed to pay much less with money after the pandemic is over. See ECB (2020), “Survey on the affect of the pandemic on money traits (IMPACT)”, in ECB (2020), ibid.
[9]By way of the full quantity of in-person transactions by euro space adults, money declined from 79% in 2016 to 73% in 2019. By way of the worth of in-person transactions, it fell from 54% to 48%. In some international locations, using money is reducing extra quickly.
[10]VISA and Mastercard intermediate two-thirds of EU card funds and, together with PayPal, dominate on-line funds.
[11]A current survey recognized over 200 new cost options, of which greater than one-third have been offered by start-ups. For an in depth evaluation of those options, see ECB (2019), “Implications of digitalisation in retail funds for the Eurosystem’s catalyst function”, July.
[12]See Panetta, F. (2018), “Fintech and banking: at present and tomorrow”, speech on the Bicentennial Annual Reunion of the Harvard Regulation Faculty Affiliation of Europe, Rome, 12 Might.
[13]Stablecoins are digital items of worth designed to minimise fluctuations of their value towards a reference forex or basket of currencies. To this finish, some stablecoin initiatives pledge to carry a reserve of State-issued currencies or different belongings towards which stablecoin holdings could be redeemed or exchanged. International stablecoins are initiatives which purpose to attain a worldwide footprint, with out essentially counting on current cost schemes and clearing and settlement preparations. See Bullmann, D., Klemm, J. and Pinna, A. (2019), “In seek for stability in crypto-assets: are stablecoins the answer?”, Occasional Paper Collection, No 230, ECB, August.
[14]See Panetta, F. (2020), “The 2 sides of the (secure)coin”, speech at Il Salone dei Pagamenti, 4 November.
[15]A run may happen each time customers – who bear all of the dangers – anticipate a lower within the redemption value of the stablecoin. A run is feasible even when the stablecoin issuer supplies a monetary assure, if such a assure loses credibility over time as doubts emerge concerning the issuer’s capability to soak up potential losses.
[16]Furthermore, massive investments in protected belongings by stablecoin issuers may affect the extent and volatility of actual rates of interest, with adversarial results on market functioning and the implementation of financial coverage.
[17]Reserve belongings are the belongings towards which the stablecoins are valued and redeemed.
[18]Within the present scenario the viability of such a enterprise mannequin is nevertheless challenged by the truth that quick time period charges are unfavorable.
[19]If allowed to speculate the reserve belongings within the type of risk-free deposits on the central financial institution, the stablecoin issuer may provide the stablecoin holders a method of cost that will be an in depth substitute for central financial institution cash. In distinction, the substitutability between central financial institution cash and financial institution deposits is proscribed by the truth that, on financial institution steadiness sheets, deposits are matched towards dangerous belongings (financial institution loans).
[20]Ferrari, M.M., Mehl, A. and Stracca, L. (2020), “Central financial institution digital forex in an open financial system”, Working Paper Collection, No 2488, ECB, November.
[21]In 2019 the ECB’s Governing Council formulated 5 goals that any such initiative would wish to fulfil: pan-European attain and seamless buyer expertise; comfort and low value; security and safety; European model and governance; and international acceptance.
[22]Regulation of the European Central Financial institution (EU) No 795/2014 of three July 2014.
[23]To date, oversight exercise has been targeted on conventional digital cost options corresponding to cost playing cards, direct debits, credit score transfers and e-money.
[24]The European Fee’s legislative proposal on crypto-assets (MiCA) is a vital step on this regard.
[25]These embrace cost initiation providers, cost integrators, wallets storing knowledge and tokenised cost account numbers.
[26]The ECB has already began work on privacy-enhancing strategies in cooperation with the Financial institution of Japan. See ECB and Financial institution of Japan (2020), “Balancing confidentiality and auditability in a distributed ledger atmosphere”, Undertaking Stella, February; and ECB (2019), “Exploring anonymity in central financial institution digital currencies”, In Focus, No 4, December.
[27]The bounds on particular person holdings could possibly be achieved by setting a stage of remuneration for the digital euro that will make it unattractive to carry quantities in extra of a given threshold. See Bindseil, U. and Panetta, F. (2020), “Central financial institution digital forex remuneration in a world with low or unfavorable nominal rates of interest”, VoxEU, October. Alternatively, limits on particular person holdings could possibly be achieved by imposing direct quantitative constraints.
[28]The experimentation will look at the scalability of TIPS (i.e. whether or not it may deal with the accounts of lots of of tens of millions of residents).
[29]The aim is to discover how the bearer of a digital euro could possibly be supplied with a optimistic consumer expertise.


The speech was first printed on ecb.europa.eu.