Securing Europe’s Financial Future: the case for a digital euro - Speech by Anne Marie McKiernan, Director of Financial Operations at BPFI/Accenture

Good morning everyone.

It’s a pleasure to be here with you all today. 

Let me first extend my thanks to the BPFI, for organising and hosting today’s event – Brian, Gillian and Leah and all your teams.

We hope you find the discussions insightful and very much look forward to an engaging session ahead.

In my remarks, I’ll touch on the evolving digitalisation of the financial system and payments within that; the role that central banks, including in Ireland, play in this evolution, and where digital euro fits in.  Then, I’ll update on the Eurosystem’s progress on the digital euro program, and the opportunities provided to payments sector participants in Ireland and elsewhere in the Eurosystem to get involved. 

Digitalisation in the financial system

While continuing digitalisation of the financial ecosystem is inevitable, there are still many uncertainties as to how it will evolve. Some farsighted visions of the financial system would be truly transformative, promising huge efficiency, alongside some disintermediation from some traditional players, reducing costs and complexity. An example of a transformative vision would be the ‘finternet’ (or ‘financial internet’), put forward by the BIS, whereby the entire financial system would be connected through a network of digital ledgers.¹ This transformation would connect financial ecosystems, much like the internet does, placing individuals and businesses at the centre. It would leverage innovative technologies to expand the range and quality of financial services.

Even if a Fintranet remains a very long-term vision, in the short term there are still many challenges to the status quo. These are likely to include the entry of new, tech-driven competitors, which would accelerate the pace of innovations and introduce new vulnerabilities, or the ever-increasing importance of ensuring trust and data security to reduce cyber and operational risks. At the same time,benefits of digitalisation include new investment opportunities presented by tokenisation of assets, which could reduce costs, enable peer-to-peer transactions and smart contracts, and provide settlement and clearing efficiencies.

So, the exact contours of the financial landscape of the future, and within it the payments and money ecosystem - have not yet been set down. But, while the ultimate destination is unclear, the direction of travel is one where the pace of change towards digitalisation is rapidly accelerating. We are facing profound transformation with the rise of digital assets, surging transaction volumes, diversifying payment methods, growing market demands, and evolving business models. We all need to play our part in this rapid shift towards digitalisation, participating and in some cases leading this exciting transition to faster, more efficient digital payment methods.

Role of Central Banks in digitalisation of the financial ecosystem

As digitalisation advances, there is a large amount of work ongoing by the public authorities too. I wanted to reflect on the role the Eurosystem Central Banks, including the Central Bank of Ireland, play and will continue to evolve in playing in the digitalisation of the financial ecosystem. We seek to influence change at a system level in line with our desire to foster innovation that delivers high quality outcomes for consumers.

One way we do this is via the financial market infrastructures (FMIs), which we at the Eurosystem provide. The Eurosystem is stepping up its efforts to support and foster innovation in wholesale central bank money.² To preserve and strengthen financial stability, international standards prescribe that an FMI should conduct its settlements in central bank money where practical and available. In February this year, following the conclusion of a very successful series of trials and experiments exploring the use of wholesale central bank money settlement with DLT technologies, the Eurosystem announced its decision to expand its initiative. It will develop and implement a safe and efficient platform for such settlements, which in the long term will also include foreign exchange settlement.³

Second, on the retail side, we are taking measures to account for the decline in the use of cash, fuelled by innovations in payments and changes in payment habits. Cash is, and will remain, a core element of the payments ecosystem, and the Central Bank is committed to ensuring cash remains available as a means of payment.⁴ Alongside this, the digital euro is a proactive measure to ensure that our currency remains fit for the digital age. Moreover, the importance of issuing a digital euro is gaining momentum amid escalating geopolitical risks. We must work towards reducing dependence on non-European systems. We will always have cash, but the absence of a unified, pan-European payment rail on European-owned infrastructures is a key pain point for digital payments.

Amid broader innovation in private finance, stablecoins and other private assets circulating on globally decentralized DLT platforms could have the potential to provide an alternative, non-central-bank-based, global infrastructure. Stablecoins are sometimes presented as a possible alternative to central bank digital currencies, by facilitating low-cost, fast payments transactions. But there would be significant risks to such an outcome.  These stem from potential adverse implications for European strategic autonomy (especially if they are US-dollar denominated stablecoins). And, there could be potential systemic implications for trust in money (which in turn depends on the uses of stablecoins and the associated regulatory frameworks that apply). Trust in money is at the core of what we do – and, as the President of Eurogroup, Minister Paschal Donohoe commented yesterday, support for the euro is at its highest ever, with users having confidence based on knowing that, in a crisis, we will protect it, and there is growing confidence in our ability to develop it.⁵

For banks and other deposit-takers, the most frequently articulated concerns around digital euro as a retail payments method are the risks of deposit outflows, or disintermediation. But the evolution of the payments landscape, with or without a retail digital euro, presents other disintermediation challenges, e.g. erosion of fee revenue to non-domestic bank or non-bank providers, or a diminution of banks’ client or services base, with potential wider impacts on banks’ business models.

In this context, the digital euro can serve as an important public sector offering, with all the advantages of being backed by central bank money.  First, by offering a pan-European payment solution, available throughout the euro area under European governance, the digital euro can help preserve monetary sovereignty. Second, as a claim on the European Central Bank, the digital euro would ensure that central bank money retains its role at the heart of the system, including as a safeguard to ensure price stability, especially under stressed conditions. And third, in a world increasingly dominated by platform-based payment systems⁶, it would provide an open and interoperable alternative, preventing the further fragmentation of money and payments in Europe. Therefore, one of the key arguments for the digital euro is its importance in maintaining European strategic autonomy.

The digital euro also affords an opportunity for European banks to progress their digitalisation strategies in a coherent and integrated way. 

Banks will play a key role in distributing the digital euro, acting as the main point of contact for individuals, merchants and businesses for all digital euro-related issues and performing all end-user services.

The digital euro could also provide additional business opportunities, by enabling full reach throughout the entire euro area, going beyond most private innovations which have tended to focus on specific domestic markets or a limited number of countries. In this way, the digital euro can serve as a platform to foster innovation and competition in the digital payment markets space.

Within the compensation model of digital euro, as currently foreseen in the European Commission’s draft legislative proposal⁷, intermediaries will see economic incentives comparable to other digital means of payment.

Furthermore, to mitigate potential risks to financial stability, the digital euro design will embed features such as a holding limit on digital euro accounts, and the facility to link digital euro wallets to bank accounts to allow a seamless funding and de-funding.

So far, I've focused on the digital euro and its fit in the evolving payments and money ecosystem. Let me now mention some of the many advantages which the digital euro can bring to European households and businesses. The digital euro will offer an efficient, instant-settlement alternative to existing solutions that rely on card schemes, potentially saving merchants money on fees and improving cash flow. The draft digital euro legislation also proposes safeguards to ensure a cap exists on merchant service charges. And merchants can expect wider access to European consumers, as offering digital euro will be the only non-cash European-owned universal means of payment. For consumers, the digital euro will be free of charge to pay in shops, online or paying an individual.  By design, digital euro will have enhanced privacy feature, ensuring a higher level of privacy than other digital payment methods currently offer. Also, the digital euro will feature an ‘offline solution’ to offer privacy as close to cash as possible, ensuring that personal transactions are only known to the payer and payee. And, by increasing competition in payments, consumers and merchants can be expected to benefit from the digital euro being part of the payments and money ecosystem.   

Digital Euro Programme in the Eurosystem

Work on the digital euro continues at pace in the Eurosystem. Over the past six months, the program, led by the ECB in collaboration with National Central Banks, including Central Bank of Ireland, has focused on the four main objectives of: Sourcing of potential providers; the preparation of the Scheme Rulebook; Experimentation and user research, and conducting further analysis into technical aspects. Alongside these blocks, we continue to extensively engage with all the relevant private and public stakeholders, and to support EU policymakers and the legislative process.

While the legislation package has progressed slower than expected, important advancements have been made around key topics such as the compensation model and privacy. Technical discussions continue under the Polish presidency, and will then transition into the Danish presidency from July. Overall, in light of recent geopolitical fragmentation and economic uncertainty, we see support for the digital euro having intensified.⁸

Irish payment providers and Digital Euro

In the coming year, as we move into the next phase of the project, we expect active engagement with the Irish banking and payments sector. Once the digital euro becomes available, Payment Service Providers authorised in the EU may provide digital euro services, while credit institutions  that operate a payment account must distribute the set of basic payment services upon request of their clients.

There are many opportunities for the Irish financial sector to engage to further understanding and prepare the groundwork. Across the Eurosystem, there is wide-ranging participation in a variety of fora, including the Innovation Platform, the European Retail Payments Board (ERPB) and its workshops and consultations, and the Rulebook Development Group. Nationally, we have held bi-lateral and multilateral strategic dialogues with all the providers, as well as providing extensive information and engagement via domestic fora and national events.

We need to make the best use of the lead-time available. Engaging only when the legislation is in place is a risk. Digital transformation is a key priority for banks seeking to remain competitive and meet evolving customer demands. Embedding a new form of pan-European, interoperable, digital retail payment is likely to carry long leadtimes, and will need to be integrated into digitalisation strategies across the payments ecosystem.  

Developing the digital euro involves many opportunities to deliver better public policy outcomes in Europe, but also many complex issues to deal with, including privacy and anti-fraud, data protection and governance. We analyse the potential impacts across the Eurozone and in our individual countries.  The more our financial sector is engaged in understanding and analysing the emerging developments, the better able we will be to ensure a smooth transition towards issuance; ensuring that the digital euro can realise its full potential for the banking and payments sector, and citizens across the euro area.

Thank you.