“The digital euro offers great opportunities, including for banks” Interview published in Börsen-Zeitung

Interview conducted by Martin Pirkl.
Translation: Deutsche Bundesbank

Mr Balz, what benefits would a digital euro deliver for euro area consumers that the existing payment instruments don't?

The digital euro would deliver a host of benefits for consumers. It would be universal and convenient while protecting your privacy when you pay. For the first time, we are creating a European digital payment instrument that can be used throughout the currency area. A product like the girocard, which I consider successful, reaches its limits at our country's national borders. You can use your bank card to pay while holidaying in Spain, but then it's the large global card systems that settle your transactions. This set-up is pretty much the same for the other national card systems. In addition, cash is currently the only way the general public can access central bank money. The digital euro would be the next step in the euro's development, and it would introduce default-free central bank-issued money to the digital world.

You mentioned the settlement of digital payments by card systems from outside Europe. How important do you find the strategic autonomy argument in the debate surrounding the digital euro?

That has been a factor from day one, but today it is of paramount importance. We all know that the world is going through turbulent times. And I am not just referring to Russia's war against Ukraine when I say that. The sovereignty argument has grown significantly in importance. Currency is one of the key factors in the stability of any system of government. We need to make ourselves less reliant on foreign payment service providers. In the German e-commerce space, around one euro in every three is paid via PayPal. When you see how strong the US players have become and how the Chinese ones are planning to expand, I think we need to stake out our own position with a European payment infrastructure.

Indeed: just such a European payment infrastructure is currently being built up in the private sector, in the shape of the European Payments Initiative (EPI). Doesn't that go far enough for you in terms of strategic autonomy?

It is good for us to have a European project like EPI, but at the same time we on the government side need to create a digital version of our currency. I think the EPI project is highly promising and am a great supporter. I was already saying we need a private European payment procedure when I joined the Bundesbank's Executive Board back in 2018. However, central bank digital currency is needed as well.

What needs to be done for EPI and the digital euro to complement each other in a meaningful way?

I think the two can exist well side by side. EPI is likely to become a natural partner for the digital euro. At the end of the day, we need to bring central bank digital currency to market, and EPI could become a useful distribution channel in this regard. In my view, we need to talk very intensively with the project stakeholders to hash out what that might look like. The digital euro could be integrated into the EPI wallet, for example.

Banks are making no bones about their concerns over the digital euro. One worry is that implementing the digital euro could impair financial stability as well as their own business model. What do you say to that?

All the concerns addressed to us, including those from the banking industry, are concerns we take seriously. If the digital euro did pose real risks to financial stability, we would not implement it. But I don't see that kind of risk right now. Undoubtedly, a holding limit in a banking crisis could counter the outflow of deposits towards the digital euro.

The plan is for larger payments to also be possible with the digital euro, though.

Yes, that's why we are working on something known as the waterfall approach. If a payment amount exceeds the amount of digital euro held in the digital wallet, money would be transferred automatically from the linked bank account, thereby allowing the entire amount to be settled.

Even with a holding limit, many people would probably rather keep money in digital euro in their wallets than with their bank, despite the digital euro not paying any interest. That's not a bright prospect for the banks.

For the sake of argument, let's assume there is a holding limit of €500 per person. Even if everyone in Germany maxxed out that limit, outflows of deposits from the banking system would probably be less than €50 billion. That's an amount banks in Germany would easily be able to cope with.

Moving on from the possible drawbacks for banks, what benefits would a digital euro offer for the banking industry, in your view?

First off: customer loyalty. The wallet is linked to a bank account. That doesn't mean the wallet can't be linked to a different account at a later point in time, but many consumers will undoubtedly shy away from doing that. In the face of the services and fresh ideas pitched by fintech firms, the account used for payments is now the anchor in banks' relations with their customers. Banks could create many services around the digital euro wallet. The digital euro offers great opportunities, including for banks. Incidentally, no one from the banking industry disputes this in our discussions.

What might these services look like?

In a digital world, banks can consider which data they are able to merge to make transactions even more convenient for customers. Going forward, the internet of things will also open up a great many opportunities.

In your speeches, you have proposed a token structure be chosen for the digital euro. Why is that?

We have not yet made a final decision on the technology. 2024 is an important year for determining which technologies might be used. I can very well imagine a token-based digital euro. That would open up additional opportunities, particularly for use cases in the internet of things.

Could you give an example?

Essentially, you can create your entire universe on a token. To give a simple example, once a package has been successfully delivered to the recipient, the payment transaction could then be generated automatically.

At the start of our conversation, you said that a major advantage of the digital euro was that it could be used for payments throughout the euro area. But now it looks like small retailers will have the option of not accepting it. Then we'd be back in the situation where the kiosk around the corner might only accept cash.

There are discussions about exempting small retailers from the obligation to accept the digital euro. Generally, those who do not have a payment terminal will not be required to accept the digital euro. We at the central bank would like to see as few exemptions as possible. However, the decision is up to legislators at the European level. The fewer exceptions there are, the better it will be for future acceptance of the digital euro.

You've mentioned an important word: acceptance. In Germany, especially, that will live or die by the issue of protecting privacy. How can the digital euro ensure a high level of data protection and, at the same time, not open the door to money laundering?

The Eurosystem has absolutely no commercial interest in evaluating, let alone selling, data. In any case, a digital euro would be designed in a way that would make it impossible for either the ECB or the other Eurosystem central banks to assign transactions made using the digital euro to specific individuals. We are also discussing a limit up to which transactions would be settled completely anonymously for all parties involved. Digital payments will of course always generate data trails, but it's our decision whether or not to save them for a certain period. The limit could be set at a sum that covers daily expenses. Right now, a sum of around €150 is on the table. For larger amounts, the data will be used exclusively for issues such as combating money laundering and terrorist financing.

Is the impression that data protection is mainly an issue in Germany false?

Two and a half years ago, we conducted a public survey and received 8,000 responses from Eurosystem countries. 60% of the responses came from Germany, and 60% of those focused solely on data protection and privacy. It is an important issue for us Germans especially. That's why, whenever data protection comes up in internal Eurosystem discussions, we always introduce tougher rhetoric from the German perspective. My impression is that the ECB and the other national central banks have realised how important the issue is. That's why we also need to find a neat solution. At the end of the day, you see, the important thing is public trust in this new digital form of currency.

Would it be possible to publish the code used for the digital euro as open source code as a way of strengthening trust?

Central banks are not particularly big fans of open source software. I don't believe that third parties should have access to the code. I'm quite certain that even without providing direct access to the code, we can generate trust that we are responsible actors. We are committed to ensuring that data is handled properly.

There is still no legal framework in place for the digital euro. What impact will the upcoming European elections have on the timetable?

The elections will mean that deliberations in the European Parliament will come to a halt for around six months, and we will have to see when discussions about the Single Currency Package resume in the Committee on Economic and Monetary Affairs (ECON). I think it's unrealistic for the legislative process to be completed before the second half of 2025. In my view, as someone with some experience in such matters, that would be the best-case scenario. It is encouraging that the other co-legislator, the Council of the European Union, has already scheduled additional working group meetings to discuss the proposal. However, swift progress in the legislative process could be hindered by the fact that the next two countries to hold the presidency of the Council, Hungary and Poland, are not members of the euro area.

The digital euro is not playing a role in the debates surrounding these elections. Does that worry you?

Not at all. We still have a long timeline ahead of us before the potential introduction of the digital euro. It's entirely normal that the issue has not yet taken root among the general public at this point in time. As things stand today, we are not yet able to provide any final details, because much is currently still to be decided.

When do you expect it to be introduced by?

Not before 2028.

So what are the next steps?

Three things. We will continue to work on the technology, draw up a framework - that is, define exactly how the various stakeholders should work together - and discuss marketing so that we can show people how the digital euro works. Unlike the marketing we did when the physical euro was launched, this time social media will play a key role.

The Bundesbank has had a dedicated Directorate General for the digital euro since 2024. Why did you decide to take this step?

We want to have staff who can focus entirely on this topic. One team will handle strategy and public relations, another will focus on cooperation with the other stakeholders, and a third will deal with everything related to the technology.

That will require tech-savvy people, and there's fierce competition for them on the labour market.

We've made an excellent start. I was sceptical at first, because experts like that are in high demand everywhere and some companies no doubt pay better than the Deutsche Bundesbank. However, it is evident that many highly qualified applicants find our positions very attractive. Some of them say quite openly that it is not unlikely they'll be looking for a new job in the private sector in a few years' time, but for now they want to move the digital euro forward as part of our team. I am therefore convinced that we will put together a good team.

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