What exactly are you referring to?
New technological solutions appear practically every day and redesign the landscape. There are cryptocurrencies, which may not be used for payments, but for some they may become a valid alternative for them too. There is decentralized finance (which does not rely on intermediaries such as brokers, exchanges or banks but uses smart contracts on the blockchain, ed). And there are the stablecoin (digital currencies linked to reserve currencies such as the dollar, ed) knocking on the door.
Why would the technology race be a problem for the ECB?
For example, because regulatory decisions will have to be made on these issues, but for now we don’t know if there will be a digital euro. You cannot make an informed decision on the regulation of stablecoin or decentralized finance, without knowing if there will be a public alternative. So there is a disconnect between the horizons of regulators, who now have to make decisions, and that of central banks, who are moving the work on digital currencies forward. I understand the good reasons. Drawing the architecture of a digital currency is difficult and there are aspects that require political evaluations, for example on the protection of consumer data. The ECB, like other central banks, cannot decide everything by itself. It has to consult with the 19 Member States, with the European Parliament and with public opinion. My personal view is that the market pressure will increase and the whole process will eventually develop faster than we think, because the whole world is moving so fast around us.
Are you saying that central banks and governments must act on digital money or will they end up subject to disruption by the private sector, be displaced?
The possible ‘disruption’ does not only concern payment systems. Think about banking supervision. Banks are increasingly using Big Data and algorithms in their credit decisions. But how do we make sure we understand what’s happening? Do we understand if the banks have the right governance to manage the risks that come from these tools? If supervisors have no answers, they will be blown away. Disruption everywhere, not just in payments.
Facebook is to be thanked, with its stablecoin project formerly called Libra, now Diem, because by challenging the monopoly of central banks on money did it sound the alarm?
Libra’s announcement in 2019 did indeed sound the alarm for both central banks and governments. But the ECB was proactive: it had already launched its quick payment system, Tips, in 2018. True, Libra has shown policymakers a possible scenario in which payments could be controlled by large private entities with a lot of market power and a strong ability to control and manage personal data. This potentially creates concerns about competition, privacy and the fragmentation of liquidity in the markets.
What will happen to commercial banks, with central bank digital money, and with ordinary citizens who may have deposits with the central bank connected to their smartphones?
I don’t think digital currency is the most pressing challenge facing banks today. If they are not subject to the challenge of digital currency, then they will be due to the payment solutions provided by different private entities. Today, banks are subjected to competition from smaller Fintechs on payment systems and from Big Tech, which can get into payments and credit. In China it is already accessing.
How should banks react?
They need to think about what their role will be in this new environment and how to benefit from it. European banks are defensive when it comes to technology, while in the US and Asia they go on the offensive. Most Asian banks have concluded that the technological transformation will happen anyway and are looking for ways to make money. Instead, European banks want to be protected. It worries me, because it is only one aspect of a more general attitude in Europe.
She presses central banks to launch a digital currency, but the US Federal Reserve is not planning to do so. Will his insistence end up annoying someone?
Our role at the BRI is not to tell central banks what to do, but we can help them work together. Central bank digital money has important technological aspects. And more and more technology is an area in which nations compete, when they don’t even fight each other. We do not want the discussion of the future of the global financial system to be held hostage by technological competition. We need places where central banks and other authorities continue to talk to each other about issues like digital currency. La Bri one of those places.
You work on a payment system between official digital currencies. But China is the leader here. Will you end up accelerating the global role of the yuan?
I do not believe. The digital yuan is basically an internal China project. Not primarily meant for outside use, at least not initially. It seems to me primarily a reaction from the authorities to the growing impact of their Big Tech on payment systems.
Are the Chinese authorities afraid of being displaced by Big Tech?
S. We see the same debates everywhere. Europe does not have Big Tech, but in a certain sense it would be worse because the ‘disruption’ would come from foreign Big Tech: American or Chinese.