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Source: Bundesbank

Interview conducted by Christian Siedenbiedel.
Translation: Deutsche Bundesbank

Mr Balz, is the ECB now getting serious about introducing the digital euro?

We are in an analysis phase in the Eurosystem. No decision has yet been made on whether to introduce a digital euro. But we are doing everything we can to understand all the potential effects and to ensure that we are well prepared.

What exactly is a digital euro anyway?

It is a form of digital money. As things currently stand, consumers have electronic money, which is held on current accounts at banks. And then there is central bank money in the form of cash. The digital euro could be a complement: central bank digital currency, which can also be used directly by consumers.      

One of our readers recently commented on the topic saying that if those in power now want to foist a digital euro on us, then we’re bound to have digital bread as well soon. What are the benefits of a digital euro for the consumer?

For consumers, the main benefit of the digital euro lies in its security. They’ve got money straight from the central bank. In a crisis, they wouldn’t have to worry about the stability of their digital euro, as that is guaranteed directly by the central bank. In addition, the digital euro could promote digitalisation, drive innovation, for example, in terms of payments in the Internet of Things, and reduce costs. Depending on how the rules are set up, this could mean that smaller transactions get cheaper for retailers and consumers with the digital euro. 

What would a digital euro look like in technical terms? Is it something that you carry around with you on your smartphone or are there cards like the EC card or the credit card?

As I said before, no decision has yet been taken as to whether the digital euro will be introduced at all, nor on its technical features. Two main options are being discussed. The first is an account solution, whereby the digital euro is held on central bank accounts. The second is a wallet solution where digital euro are stored on smartphones in an electronic wallet as it were. From there, they could then be used to pay for things.    

Does the digital euro have similarities to bitcoin? After all, many people have come to see bitcoin as something of a cautionary tale, at least in terms of its use as a means of payment, given its strong price volatility …

No, the digital euro would be backed by the monetary union and the Eurosystem’s central banks. This is the crucial difference as compared with a private crypto-asset such as bitcoin. The prices of these crypto-assets are very volatile, something speculators exploit. The European Central Bank, meanwhile, would do everything it can to guarantee monetary stability, as it has always done with the normal euro.

How do I, as a consumer, even get my hands on the digital euro if it is issued by the central bank and not by my bank or savings bank?

The central bank would issue the digital euro, but in terms of its distribution, consumers would probably be able to exchange existing bank balances or cash for digital euro. It is entirely conceivable that they would do so through their bank or savings bank – just as they currently receive central bank money in the form of cash there.

What would the digital euro mean for Germany’s banks? What areas might need to be watched?

The digital euro could have far-reaching consequences for our financial system, especially as it could be a substitute for bank deposits. This is why it is important to keep issues including financial stability in mind when planning for the digital euro. In a crisis, the digital euro’s security for consumers especially could cause greater uncertainty in the financial system.

Why – what happens in a crisis if citizens can choose between electronic bank money and central bank money?

The danger would be that a great many people would want to exchange the money they hold with banks into digital euro, and, to aggravate matters, possibly do so in a relatively short space of time. That could jeopardise the stability of the financial system.

Is that something that can be solved?

Essentially, yes. What is under discussion, for example, are ceilings on holdings of central bank digital currency. Another possibility are very low interest rates for digital euro credit balances beyond a given basic amount. That could create incentives to use central bank money for payments, but not for storing value – that is, for savings.  On the other hand, there could emerge pressure to soften or shift such constrictions. We are currently analysing possible implications for the financial system and the economy and how we might effectively deal with them.

ECB studies talk about the possibility of applying negative interest rates to the digital euro above a certain ceiling to prevent its overuse as a store of value. Is the digital euro a way of being able to introduce negative interest rates for all even on money not held in bank accounts?

That is an impression we should avoid under all circumstances. Otherwise, we’ll not find any acceptance for the digital euro. That impression is also incorrect because these studies are not about forcing through negative interest rates on all credit balances but being able to regulate the scale of shifts from bank deposits into digital central bank currency by means of the interest rate.  If that gives members of the general public cause to fear that the nominal value of their credit balances is no longer secure, we can, as I see it, commit to negative interest rates on digital euro not being permissible up to a certain limit. Perhaps that would calm the fears somewhat.

Will the digital euro replace cash at some point then?

No one knows how things will be in the long term. First of all, the digital euro is intended to complement the existing payment options. Cash isn’t going to be abolished for it – there is a major consensus about that in the Eurosystem. I’d think it likely that the percentage of cashless payments will increase in future, but cash will continue to exist despite that.

Can the digital euro offer what members of the general public appreciate about cash – anonymity, not being checked, the freedom?

If the digital euro is accepted – not only by the general public but by shops and other businesses – it will introduce more freedom of choice into payments. With regard to anonymity, it’s important to ensure that personal data are protected but also, as in the case of cash, to prevent misuse – say, for money laundering or other criminal activities – as far as possible.

To ask a provoking question: will I be able to use it to pay for something without the tax office noticing?

Honest members of the public who pay their taxes won’t have any problem with it.

Talking realistically, how long will it take before the digital euro is actually in use?

Once again: we haven’t made a decision yet. But everyone is working all out on this matter. In China, the digital yuan is being tested in four regions. It could be rolled out nationwide as early as next year. That is something we’ll be taking on board in our analyses in the Eurosystem.

Is it possible to divulge anything from the ECB’s in-house tests that started last week?

Testing out ideas on how the digital euro could also be implemented technically is precisely the point of these exercises. They are at the experimental stage and do not really involve any programming yet. But they are looking at what national central banks in the monetary union already have what experience.

Who among the central banks would be likely to take care of the digital euro then? The Bundesbank, like with cash, or the ECB itself as the central institution?

This question is not yet a priority at the moment. But we could well imagine that things will be done as they are with cash.

Is there time pressure to introduce the digital euro because China, Sweden or even Facebook might otherwise to be quicker with their models?

Yes, I can see that. If China introduces a digital currency, for example, the United States will also come under pressure to do something comparable with the dollar in order to safeguard its international position. And that would also ramp up the pressure on the Eurosystem. I would, however, subscribe to what the Fed Chairman, Jerome Powell, said recently about central bank digital currency. It’s better to get it right than to be first.  

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