Conception and Prospects of Digital Euro

Foreword: Martin Arnold, director of the Frankfurt branch of the Financial Times, interviewed Fabio Panetta, executive director of the European Central Bank. The full text was asked by Martin Arnold, director of the Frankfurt branch of the Financial Times, and Fabio Panetta, executive director of the European Central Bank, answered:

Question 1: The European Central Bank (ECB) is now about to decide whether to carry out further research and development of the digital euro. You have recently completed a public consultation on the digital euro, and the one that has received the most attention is user privacy. So I would like to ask: How do you plan to respond to people’s concerns about privacy while ensuring the smooth implementation of necessary compliance work such as anti-money laundering and anti-tax evasion?

Answer: We (referring to the European Central Bank, the same below) believe that if the central bank develops digital payment-related services, user privacy can be better protected. Why do you say that? Because the central bank is different from private companies, we do not store, analyze, or use user data for digital payment tools for profit-making purposes. We do not seek to maximize profits, but work for the public interest. This is the biggest difference between us and the private sector. The results of the public opinion consultation some time ago also support this view: Compared with private companies, people feel more at ease about the management of user data by public institutions such as the central bank.
We can protect user privacy in a variety of ways, and at the same time carry out anti-money laundering, anti-terrorist financing, anti-tax evasion and other related illegal transaction inspections required by law.

Question 2: How to implement it?

Answer: First of all, we can isolate user data. Suppose I want to transfer money to you: I am the payer and you are the payee. I can first send a payment transaction request to my account opening bank. After receiving the request, the bank sends a code to the payment execution module, and the execution module transfers the transfer amount from one code to another. For the transaction executor, it does not know the real identities of the payer and the payee in this transaction. When the transaction is completed, no party in the payment chain can obtain all the transaction information. The above is just a simple example, we can also use encrypted code. For another example, we can implement small offline payments. In this case, no third party will record transaction data except for the e-wallets of the receiver and the payer. People are expected to complete micropayments of less than 70 (or 100) euros offline.

Question 3: But if you want to set a user’s transaction limit, don’t you still need to verify the user’s identity through the Internet?

Answer: For this kind of small transactions, it is not necessary to do identity verification. We have no reason to track all transactions. Although there may be illegal acts such as money laundering, terrorist financing, and tax evasion, unless large funds are split into multiple small payments to evade supervision, under normal circumstances, small transactions are risky. Lower. In previous experiments, we used the form of “digital euro bearer vouchers” to achieve anonymous transfers within a limited time and a limited amount. Therefore, our philosophy is to control the cost-effectiveness of related control measures. For very small payment transactions, we can allow complete anonymity, but in general, the two concepts of “confidentiality” and “privacy” are different from “anonymity”. We must consider complete anonymity very carefully, because we need to make the necessary trade-offs between complete anonymity and compliance with basic regulatory requirements (such as anti-money laundering, anti-terrorist financing, and tax evasion). At the same time, don’t forget that the public can continue to use cash to meet the needs of anonymous transactions. With the help of technology, we can not only make users feel at ease how their data is used, but also restore a certain transaction after the fact, so that the police can investigate possible illegal and criminal acts. We are different from private payment companies, which focus on the commercial value of transaction data. We have completed preliminary experiments on the confidentiality of digital currencies with the central banks of some countries, and relevant experimental reports will be released in the future. Therefore, we are discussing possible ways to protect privacy. The reasons for this are obvious. The results of the public opinion consultation you mentioned just now highlight the public’s concern for privacy. Privacy protection is the number one demand.

Question 4: So what do you think of this statement, that is, since the European Central Bank is a public sector and does not involve commercial interests, will it investigate the use of users’ funds in the name of the government?

Answer: Starting from the premise that public institutions can be trusted by the public, we will establish an appropriate governance structure to avoid data abuse. We will act within the EU’s legislative system, which is currently the world’s leading user data protection system, and we will deal with an independent data protection inspector.

Question 5: Can you disclose more information about the digital euro project? What does the project include?

Answer: The tests we are currently doing are mainly to get a preliminary understanding of the advantages, disadvantages and limitations of different technologies, for example, to ensure confidentiality when processing payment transactions. In this initial stage, we organized 4 sub-projects to test the operation of the digital euro in a centralized system, the operation of the digital euro in a decentralized system, and the operation of the digital euro in a composite system with both centralization and decentralization. , And the feasibility of offline transactions. If approved by the European Central Bank Management Committee in July this year, we will enter the formal research phase of the digital euro design. Two years later, we will report the survey results to the management committee. At the same time, because the implementation of the digital euro requires changes to relevant laws, we will cooperate with other European authorities (such as the European Parliament, the European Commission, the Council of Europe, and the countries of the euro zone, etc. Stakeholders) fully interact. If all goes well, at the end of the two-year survey, we will have a clearer understanding of the steps required to issue a digital euro (if a decision is made in the future). After that, it may take another three years to implement the digital euro issuance plan that we decided to adopt. During this period, we will cooperate with technology companies and commercial banks to develop end-user functions of the digital euro in order to integrate the digital euro into existing payments. Among products and services.

Question 6: Why does the issuance of a digital euro need to be raised to the legislative level?

Answer: Because the current European legal system does not have relevant provisions that can clearly define the digital euro. According to different design characteristics, different legal basis can be defined for the digital euro. The existing legal system needs to make necessary adjustments for the emergence of the digital euro. For example, in order to facilitate the post-mortem investigation of anti-money laundering agencies, they need to be allowed to investigate transactions based on the digital euro while investigating bank account transactions.

Question 7: Please allow me to switch to another topic: Now some people will scratch their heads and ask: What specific problems do you envision the digital euro project to solve? Or what is the point of issuing a digital euro?

Answer: First of all, from ancient Greece to ancient Rome, to the Charlemagne Empire, sovereign countries have been providing the public with so-called sovereign currencies for centuries . This is the ultimate means of storing value. We, the European Central Bank, are currently doing this (issuing euros) and intend to continue doing it. So why do we use digital euros to do this? There are two main reasons: one is that people are using more and more digital payments, and the use of cash is less and less; the second is that people are shopping more and more online, and in the field of e-commerce, it is more difficult to use cash. Therefore, the situation of people directly using central bank currency for payment is becoming less. We are entering a digital era, so the introduction of the digital euro can change the way people use central bank currency to pay and directly interact with the central bank’s balance sheet.

Question 8: So are you dealing with the decline of paper money? But people can use electronic money to complete digital payments instead of having to use digital euros. For example, if I sit here and operate my mobile phone, can I buy almost all goods and services online?

Answer: In the Eurozone from Finland to the north and Cyprus to the south, there is currently no digital payment method that can be used anywhere

Question 9: Is it not possible to use Visa?

Answer: First of all, Visa cannot be used wherever it goes. As you know, even on our side in Frankfurt (where the European Central Bank is headquartered), you cannot use Visa or American Express to make purchases in every store. In addition, the cost of using these cards is relatively high. Secondly, I think it is not only for the survival of the central bank’s currency and issuance functions, but also for other reasons: First, we will provide a risk-free payment method. I think people have the right to directly contact the central bank. The balance sheet interacts. As the only risk-free institution, the probability of risk is even lower than that of sovereign countries. In most cases, commercial bank liabilities are quite similar to central bank liabilities, but in some cases, there are essential differences between the two. Do you remember that when the financial crisis broke out, commercial banks no longer trusted each other? Under this circumstance, both commercial banks and ordinary people no longer regard commercial bank liabilities as risk-free. Therefore, in the economy, there must be a risk-free means of payment and financial instruments, which are central bank liabilities.

Question 10: Are you also worried about the threat from cryptocurrencies or other central bank currencies?

Answer: This is not the reason why we started relevant research and may officially issue a digital euro in the future, but there is indeed a potential threat from digital currencies issued by other entities. This may be a so-called global stable currency (which may be referred to as Libra) or a digital currency issued by a sovereign country. If people want to use digital payment methods, and we do not provide them with corresponding payment options, third parties will definitely take advantage of it. So I can tell you many reasons, and they are not only related to payment. I think this historic change will not only change the way the financial system operates, but also change the public’s attitude towards various digital payment tools. This will bring fundamental changes to the operation of the future payment system from the financial system and even the whole society. This prospect is very attractive.

Question 11: Do you think that the public will have a very different experience when using the digital euro? Because from a legal point of view, they will directly hold assets to the central bank. But in any case, the digital euro must eventually be reflected in the number displayed on the screen of the mobile phone, which is the same as the number of deposits on mobile banking, right?

Answer: In most cases it is exactly what you said, but in some cases it is quite different. The warning from the past financial crisis is profound: the public is not incapable of making distinctions. Most of the time, they do not need to choose between payment methods provided by different institutions. But in some cases, people have a very clear understanding of different payment options and will make optimal choices. Unless the deposit risk of commercial banks increases, people will not particularly care about holding bank demand deposits or cash, but when faced with a financial crisis, people will be very concerned about the difference between different payment methods and start making choices very seriously.

Question 12: Some people suspect that the European Central Bank will directly operate a digital euro account. Is this true? Are you more likely to outsource related management and operations to commercial banks and financial technology companies?

Answer: The central bank’s direct responsibility for managing personal digital euro accounts is theoretically feasible, but it is almost impossible for us to adopt this model. why? First, there are currently about 2 million or more commercial bank employees in Europe, providing financial services to about 400 million customers. For the European Central Bank, which has a limited number of employees, this is hard work beyond its ability. So even if we intend to directly manage personal digital euro accounts, we still cannot do it. Although we can work efficiently, we still can’t realize such unrealistic ideas. Secondly, we don’t want to see the issuance of digital euros that will change the structure or impact of the financial system. Stable operation of the financial sector. At present, commercial banks can provide the public with very rich financial services. In the future, they can provide the public with various value-added services based on the digital euro. Commercial banks do better than the central bank in terms of customer acquisition, customer identification, and anti-money laundering investigations. The central bank cannot actually complete all of these tasks on its own, so even if it is theoretically feasible, it is unlikely to do so. We hope that the digital euro can become some kind of “raw materials”. We wholesale these “raw materials” to commercial banks, and they can exchange them with the public (just like they now provide cash withdrawal services). At the same time, commercial banks will also add to existing services. Digital Euro option.

Question 13: Do you only cooperate with commercial banks?

Answer: This statement is not very accurate. It should be said that in the future, digital euro payment services will still be provided by various compliant and regulated payment intermediaries. Therefore, we will not only cooperate with commercial banks .

Question 14: Will the issuance of a digital euro impact the innovation activities of the private sector?

Answer: In terms of providing services to the public, we are a relatively special organization. Generally speaking, service providers in the private sector want to compete for market share from competitors. The European Central Bank does not have this idea. What we want to do is exactly what we want to do. Try to eliminate the possible negative impact of the digital euro on commercial banks and innovative activities in the payment field. I think the digital euro will promote rather than curb innovation. We will not squeeze commercial banks out of the payment market, because the digital euro is a public product provided by the central bank to support innovation, progress and efficiency in the financial system.

Question 15: Understood, then one of your first concerns is: Avoid any form of instability in the commercial banking system, or accelerate public runs on commercial banks during the financial crisis?

Answer: Your understanding is completely correct! We are thinking about how to avoid this from happening. What we hope to provide is a payment method rather than an investment target. In order to avoid the crowding-out effect on commercial bank deposits, we are exploring possible countermeasures. One of them is to set an upper limit for the balance of digital euro accounts for individual users. Is returned to a bank account ; the other option does not set a balance limit, but if the account balance exceeds a certain limit, it may face negative incentives such as negative interest rates . For example, the digital euro within 3,000 euros enjoys the same treatment as cash, that is, no negative interest will be charged. But if you want to hold a digital euro that exceeds the limit for various reasons, you must accept the corresponding negative interest rate penalty. Why should we do this? Because if the public can hold any amount of digital euros, it means that before the onset of the financial crisis, when people predict that commercial banks will have problems, they may convert all commercial bank deposits into digital euros, which will cause turmoil in the financial system . By the way, these design ideas first proposed by the European Central Bank are currently being discussed extensively around the world.

Question 16: So which control measure do you personally prefer?

Answer: It is not yet certain. We can only make a final decision after soliciting opinions from various stakeholders, the public, the business community, and commercial banks. In addition, each option has corresponding policy implications, pros and cons. For example, the effect of the balance limit is more direct, as long as you reach 3000 euros, you can no longer continue to transfer money to the digital euro account. However, there are drawbacks to this approach. For example, you already have 2800 euros in your digital euro account. If I owe you 500 euros and I want to transfer 500 euros to your digital euro account, then the 300 euros that exceed the 3000 euro limit How should it be handled? Either the system judges that the transaction has failed, which brings about serious problems that the result of the transaction may be uncertain, or it establishes an overflow handling mechanism to transfer the excess of 300 euros back to your bank account, but this requires you to have it first A bank account is a departure from the philosophy of inclusive finance that we pursue. We will provide a channel for free exchange of digital euros to ordinary bank accounts. In comparison, the method of grading interest according to the limit is more easily accepted by the market, but its effectiveness seems to be insufficient. Because in the financial crisis, once you are worried that your deposit bank will have a problem, it is actually difficult for us to implement penalties that are strong enough to stop you from cashing out bank deposits to your digital euro account. Therefore, when the public is worried that the crisis is about to come, in order to prevent bank runs, we can only further lower the negative interest rate threshold of the digital euro. However, this approach itself is a signal that a certain crisis is coming and requires very careful operation. So you should understand by now that although there are policy options such as setting a balance limit and tiered interest calculation, they all have their own pros and cons when implemented, that is, there is no so-called one-size-fits-all strategy.

Question 17: Will the digital euro use blockchain or distributed accounting technology?

Answer: In our tests, two different systems have been used. One of them is a centralized ledger system called TIPS . We use this system to analyze the actual operation of the digital euro design, such as how many transactions the system can process per second, and how much time it takes to complete each transaction, etc. We have achieved gratifying test results using the TIPS system: that is, hundreds of millions of transactions can be processed every day, and each transaction is completed almost instantaneously. We also studied distributed ledger technology (DLT) . Although commercial banks are currently using different DLT technologies to complete financial transactions, there is no DLT technology that can meet the daily transaction needs of 400 million users. We have also tested a composite system that combines the advantages of centralized and distributed design (after all, there is no reason not to use two seemingly opposite designs at the same time). For example, build a centralized system with different nodes, and each distributed node can interact with Back-office center interaction, so as to double the effectiveness of the overall system. Of course, IT experts in this area have more say.

Question 18: What do you think of the regulation of cryptocurrencies and stablecoins? Do you think that stablecoins need to be subject to stricter control?

Answer: There are currently some unstable currencies on the market. For these virtual currencies to become stable currencies, a necessary but not sufficient condition is that they need to be subject to supervision. Obviously, all kinds of virtual currencies not only bring a series of risks to individual holders, but also to the financial system. What is the basic logic of the so-called stable currency or unstable currency? To put it simply, stablecoin issuers use the proceeds from the sale of virtual currencies to invest in various reserve assets, but the value of these so-called reserve assets is not stable. These assets can be called low-risk assets, but they are by no means risk-free. assets. It is also unclear whether the issuers of these stablecoins hold a sufficient amount of reserve assets to cover the total value of virtual currencies in circulation. Therefore, the value of reserve assets may fluctuate, and the value of stablecoins may also change accordingly. When the financial situation is tense, since the value of the backing assets may fluctuate sharply, the value of stablecoins may also fluctuate sharply. The holders of stablecoins are likely to apply for redemption from the issuer, which often means a run s inception. Unlike the commercial banking system, there is currently no supervision in the virtual currency field: there is no deposit insurance system, no emergency liquidity support provided by the central bank, etc., because the central bank cannot use public funds to save those who have never seriously fulfilled the high risk of prudential supervision requirements Institutions, that is to say, the operating mechanism of stable coins is inherently unstable. In this sense, they are also unstable coins. If we conduct compliance supervision on stablecoins, maybe they will become more in line with their names. In fact, only the currency issued by the central bank is truly stable. At present, in terms of virtual currency supervision, Europe ranks among the top in the world. The European Commission’s legislative proposal on the regulation of the crypto asset market (MiCA) is expected to initiate a series of compliance and risk control mechanisms to reduce the risks of virtual currency to consumers and the stability of the financial system. This legislative proposal actually also released a signal: only after the relevant supervision is in place, stablecoins may carry out formal business activities in the euro area. At the same time, we are also looking forward to building a corresponding regulatory framework. We are demonstrating a new regulatory framework for Euro payment instruments, the so-called PISA regulatory framework. The framework will also cover stablecoins when implemented. Related supervision. In short, after the supervision is in place, we can explore the possibility of formal introduction of stablecoins.

Question 19: How do you currently control Bitcoin and similar cryptocurrencies when supervision is not in place?

Answer: There is currently no formal regulatory mechanism that can prevent investors in the Eurozone from buying encrypted assets. Encrypted assets are neither currency nor money, and the risks they carry are very high! I think the need for careful supervision of encrypted assets, that is, the European Commission’s proposal to supervise the encrypted asset market (MiCA) mentioned earlier, the PISA regulatory framework also provides us with the possibility of supervising encrypted assets.

Question 20: What does the regulation of encrypted assets mean?

Answer: There are many difficulties in the supervision of encrypted assets, because encrypted assets are distributed accounting, and no specific legal entity can be responsible for them. They can exist in China, Switzerland, South America, or any other location. However, if payment companies participate in the issuance of virtual assets, we may have a regulatory hand.
In my opinion, encrypted assets are very dangerous products. They are not currencies in nature, but some digital contracts that are very beneficial to gamblers. We should do our best to protect the rights and interests of consumers. In addition, we can learn from recent incidents that these encrypted assets are mainly used for criminal activities. In addition, the well-known Bitcoin mining behavior still has the problem of consuming huge amounts of energy, which is obviously unsustainable.

Question 21: When can the supervision of encrypted assets be officially launched? For example, when can the PISA framework you mentioned be implemented?

Answer: I hope that by the end of this year, of course, we need the MiCA regulatory system mentioned earlier to be implemented. MiCA and PISA are mutually complementary.

Question 22: Let’s talk about the possible impact of the digital euro on monetary policy? You talked about collecting negative profits to prevent the public from holding too many digital euros. Will this bring more serious negative profits?

Answer: No, because first of all we do not intend to withdraw cash from circulation. In addition, after imposing a negative interest on the digital euro that exceeds the limit, if we adjust the interest rate too low, people will turn it back because of the cost of holding. Cash, and eventually form an equilibrium interest rate.
We are not introducing a digital euro because we want to change the implementation of monetary policy in any way; we do not intend to eliminate cash either. We will never implement monetary policy through the digital euro, nor do we intend to further implement negative interest rates through the digital euro from the beginning. After all, we will continue to provide cash to the public.

Question 23: Can you talk about the issuance of the digital euro and related costs?

Answer: At present, the European Central Bank needs to pay the cost of printing banknotes. Although this cost is not shared among the public, we have not lost money because of this, because we have obtained seigniorage from the issuance, that is, the face value and issuance of the banknotes. The difference between costs. Similar to this is the issuance of digital euros. Although we will not distribute the issuance costs to the holders, we will certainly not lose money as a result. The existence of seigniorage means that we will have an expanding balance sheet, and we can obtain income through normal market investment behavior. As part of the formal research phase of the digital euro design, we will discuss the overall structure of the digital euro and how stakeholders will charge for transactions. Of course, the public does not need to pay for the digital euro. I don’t think the cost of issuing a digital euro will be very high. Based on the experience we have gained in the field of wholesale and retail payments, suppose we use the existing TIPS technology. At the same time, given that central banks are already using DLT technology, the related costs are completely controllable. , And the benefits will be considerable. Obtaining more seigniorage is also a way for the central bank to achieve steady growth in the scale of its balance sheet.

Question 24: So can third-party payment companies benefit from it?

Answer: The European Central Bank will not charge the public a fee for using the digital euro. Third-party payment companies can make money by providing related services that support the digital euro. But this is a more complicated issue involving the interaction between commercial banks, third-party payment companies, and consumers. In addition, we also need to ensure market competition to protect consumers from being overcharged for services.

Question 25: For ordinary people, how will the digital euro change the financial system and monetary system?

Answer: The digital euro is a huge driving force for the digitalization process. It allows everyone to use a safe, risk-free and free payment method in the digital age. We are still in a transitional period, but if another 20 years pass, everyone should be able to use digital payment tools. But I am not sure everyone will use digital methods to pay, so digital euro and cash can coexist in the future. We can also provide programmable products at a lower cost. Users can set up automatic payments in daily transactions, such as paying bills, traveling tolls, buying movie tickets, paying parking fees, etc.

Question 26: The last question: Will the digital euro in the future only be circulated in the euro area, or can it be used outside the euro area? If it can be used across borders, will it erode the monetary sovereignty of some small countries?

Answer: There is indeed such a danger, which is why we are considering which potential users can use the digital euro. In the euro area, the 3,000 euro limit can already meet the current demand for cash by most people, but in some countries with relatively low per capita GDP (some of which are located in the euro area annex), transfer 3,000 euros from bank accounts to digital euro accounts If a large number of such actions occur, it may cause turbulence in the country’s financial system. In view of this, we will very carefully consider whether to allow foreign users to obtain digital euros and impose limit management. Of course, foreign tourists to the euro zone can use the digital euro within the limit.
Finally, the digital euro may have a more positive international application prospect, which is to achieve more efficient cross-border payments. We have carried out relevant cooperation at the international level. If the central bank’s digital currency has a certain degree of interoperability, it can maximize the benefits it can bring and make cross-border payments more convenient and cheaper.

Translator: Kang Wei

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