Herodotou: A digital euro is necessary to address the digital revolution

The European Central Bank (ECB) is moving closer to creating a digital euro and considers it necessary to address the challenges brought by the digital revolution, Central Bank of Cyprus (CBC) Governor Constantinos Herodotou has said.

Addressing the 11th Banking Forum and Fintech Expo in Nicosia, Herodotou said the ECB’s aim is to maintain the role of sovereign money – “a public good that central banks manage in the public interest” - while securing both innovation in payments and the financial sector’s stability.

“The intention of the ECB is to give consumers the option to use the safest form of money, that is central bank money, in a digital format, complementing existing euro banknotes and coins,” said Herodotou, adding that the digital euro would be inclusive, serving 347 million people in the euro area. “It would be free of charge and a truly European solution for day-to-day payments: online, in shops or from person-to-person, with wide usability and accessibility from Finland to Greece and from Portugal to Cyprus. It would offer high privacy levels and offline use. Nowadays, no other means of payment offers all these characteristics at once.”

According to Herodotou, as Bigtechs are further expanding into digital finance, there are risks to the Euro payment system, as well as to its monetary and financial stability, especially from a potential issuance of their own currency. “This is not mere speculation, as evidenced by the decision of PayPal to launch its own dollar-denominated stablecoin,” he said.

PayPal has a user base 1.3 times bigger than the Eurozone’s population - therefore such a venture poses challenges at least under three areas, he said.

“Firstly, to the functioning of our payment system. Stablecoins are structured as ‘closed-loop solutions’ that restrict payments to users who adopt a particular payment tool. Secondly, if citizens prefer to use stablecoins issued by Bigtechs instead of money issued by a central bank, then public money could ultimately lose its role as an anchor that has been safeguarding for decades the convertibility of commercial bank deposits or liquidity, into central bank money at par value. This is what actually happens without realising it when we withdraw cash from an ATM: our sight deposits, that are a liability for commercial banks are turned into a liability for the central bank, with cash being the safest form of money and the reason why we trust the currency. In the absence of a digital euro, we would risk losing central bank money as a visible symbol, linking the various forms of private digital money to the State. This could undermine trust in the euro area and ultimately in its monetary sovereignty. Thirdly, there could be risks to the financial stability of the euro area, as Bigtechs would not be concerned with avoiding disruptions to financial intermediation, or the impact on the financial sector’s liquidity, or ensuring a balanced compensation model for all involved stakeholders, that is the intermediaries, acquirers and merchants.”

And so, he added, “Within this spirit, at the European Central Bank we consider that making our currency – the euro - available in the digital sphere, is necessary to address the challenges brought by the digital revolution, in order to maintain the role of sovereign money - a public good that central banks manage in the public interest - while securing both innovation in payments and the financial sector’s stability.”

As the CBC governor explained, the digital euro would not be a threat to the role of banks as financial intermediaries. The remuneration and quantity constraints per person, would stop the digital euro from competing with banks for deposits. “Besides, the design of the digital euro is for providing a means of payment only – not a means of speculative value play as is the case for the so-called crypto-assets- and banks could constitute an integral part of the digital euro payment solution, through for example their front-end services. The central bank will not interact directly with end-users,” said Herodotou.

If the ECB’s Governing Council decides at the end of the process to introduce the digital euro, he added, following the completion of the preparatory and legislative phases, the digital version of its currency will address some of the challenges brought about by the technological revolution. It would contribute to Europe’s strategic autonomy, by providing payment service providers a platform for innovation, immediately scalable at European level. The payment solutions currently available in many European countries have not achieved a pan-European dimension, thus citizens cannot fully harness their benefits, he said.

According to Herodotou, the ECB has completed the consultation phase that was launched in October 2021 and lasted two years. “Based on the outcome of this phase, at the Governing Council of the ECB we agreed to design the digital euro, such that it would be widely accessible to citizens and businesses through distribution by supervised intermediaries,” he said.

As from the 1 November 2023, the Governing Council of the ECB approved the launch of the preparation phase, during which it will develop and test technical solutions and business arrangements for its digital currency, as well as finalise the rulebook and select providers that could develop a digital euro platform and infrastructure, said Herodotou.

“The ECB’s project has benefited so far from the expertise of European policymakers, and the rapport with market participants, civil society and the general public. The Eurosystem will continue this journey with stakeholders and will adjust the digital euro design upon finalisation of the legislative negotiations that are running in parallel.”

The 11th Banking Forum and Fintech Expo is organised by IMH. The event is designed to bring Members of the Board of Directors, CEOs, Senior Managers, Heads and officers of retail, commercial and corporate banking, Heads and officers from SMEs banking, Strategy Departments, Risk Management Departments, Cards departments, CRM and Customer Data Management Systems, IT departments, Marketing Departments.

This year’s Main Sponsor is Logicom Solutions. It is also sponsored by eBOS, Ecommbx, Ellinas Finance and i-exceed.