The digital euro: cash in your mobile phone

In mid-January, the European Central Bank published the initial results of a survey of citizens, companies and industry associations on the digital euro. A decision on the development of the digital euro, i.e. digital central bank money, is to be taken soon.

ECB President Christine Lagarde has commented that there will be a digital euro. Within the next five years, citizens in the European Union could be shopping using their digital wallet on their mobile phone. An ambitious goal. And at the same time a small revolution: central bank money is currently only available to private individuals and companies in physical form as cash.

What does the introduction of a digital euro mean for politics and the economy, for banks, companies and consumers? Answers to these questions are provided by three Commerzbank experts:
Thu Lan Nguyen is a foreign exchange analyst in GM-Research, one of her specialisms being cryptocurrencies. Sebastian Kraft is responsible for Commerzbank’s blockchain projects as senior product owner in the DLT Lab of the Group Technology Foundation. Among other things, he works on blockchain-based digital payment processes and also represents Commerzbank on these topics in various associations.
Benjamin Duve sheds light on the topic from the product and sales side; as Head of Digital Assets & Custody in Capital Markets & Advisory and as one of Commerzbank’s committee representatives on digital capital market infrastructure and the digital euro (BdB, Association of German Banks), he brings the client and bank perspective to the discussion.

Ms. Nguyen, why is the discussion about the digital euro so much in the public spotlight at the moment?
Thu Lan Nguyen: Well, I'd say that in the euro area we're rather late arrivals in this respect. Many central banks have been experimenting with “central bank digital currencies” (CBDCs) for some time. Leading the way is China, which already issued the digital yuan in a pilot region in 2020, and Sweden, which has launched the e-krona on a pilot basis.

The European Union wants to introduce the digital euro in order to strengthen the euro’s influence as an international currency – and Europe’s influence as a trading partner – worldwide. The digital euro would be the answer to the threat to Europe’s digital sovereignty posed by the Facebook currency “Diem”, renamed “Libra”, as well as other “private currency”, cryptocurrencies and the digital central bank money of other countries. Unlike cryptocurrencies, a digital euro would be under the supervision of the central bank, which ensures the stability of the currency.

What does the digital euro mean for central banks and for private and commercial banks?
Thu Lan Nguyen: The digital euro – at least in the form in which the central bank is discussing it – would be a digital cash equivalent. If we currently pay for our purchases with our EC or credit card, we're using what's known as “scriptural money”. There are claims against the commercial bank; scriptural money is associated with credit risks. The digital euro is digital cash, where the claims are against the central bank.

The central bank would also be the bank that issues the cash. Here, however, many would urge caution: depending on the attractiveness of the digital central bank money, citizens could exchange their bank deposits for digital central bank money on a large scale, causing a “bank run” and hampering money creation and bank lending. To get a handle on this issue, there's discussion around introducing maximum amounts or negative interest for digital cash held in the wallet.

Consumers could load a certain amount of cash into their electronic wallet and use it to pay at the store?
Sebastian Kraft
: Yes, that would be conceivable and then simply an additional means of payment. You don't of course abolish traditional cash or other existing payment methods. Whether the digital euro is accepted by the public and businesses depends on whether it offers real added value; after all, convenient digital means of payment already exist and are being continuously developed. In the case of digital payment, this added value could be anonymity, because payment with the digital euro would be just as anonymous, depending on how it's organised, as is the case with traditional cash, at least below certain amount limits.

And how would companies use the digital euro?
Sebastian Kraft
: Companies wouldn't get far with the limited wallet mentioned by Thu Lan. However, some corporate clients are already asking us about new payment solutions that can be “programmed” and to meet the requirements of networked industry 4.0 better than the processes currently available. This means, for example, that transactions can be automated and carried out directly between companies or even machines when certain conditions are met. In some cases, this results in considerable efficiency potential for our customers, and this is where blockchain technology comes into play. Digital central bank money is not absolutely necessary for this purpose; a scriptural money token could also meet the requirements. In 2019, for example, we issued “e-money” on a blockchain together with Daimler Trucks; a self-driving truck filled up its tank fully automatically and paid with digital money.

Benjamin Duve: To put it simply, I pay with my mobile phone or my watch, and basically every Commerzbank customer can already do that today. What's important or new here, apart from the central bank’s digital euro, is what else the new money can do and what our clients want to use it for. We're currently involved in a good number of discussions here, both internally and in the market. Currently, what I'd say from a banking perspective is that for most of our clients, it would be very interesting to have a universally applicable solution with token-based scriptural money. And with new features like programmability. Access for users of a digital euro of this kind would then be provided by the banks, as is currently the case. To answer this conclusively, we need an even better understanding of our clients’ requirements based on what they ask of us, in order to be innovative and successful, and also to be aware of other aspects.

The universal solution would then have to be technically supported by all parties involved. What would this mean for global payment transactions, the capital market business and also document processing?
Benjamin Duve
: From a capital market perspective, we're very interested in the digital usability of the currency, for example, as a means of settlement for the newly emerging digital securities that can be mapped on DLT technology. Here, we want to use central bank money in order to be able to carry out risk-minimised delivery against performance transactions. Here, too, we are looking at various solutions: from a trigger solution from the Bundesbank with a Target2 link to “Fnality”, which potentially covers various currency areas, to the digital euro for interbank transactions, also known as “wholesale CBDC”.

Sebastian Kraft: Beyond that, banks could combine the benefits of highly efficient and already digital payments with those of blockchain technology for their clients and develop their own blockchain-based products for business.

Benjamin Duve: Exactly, and as an enthusiast for DLT technology, I see the technical development as an opportunity. Even beyond our current state of discussion in the Bank, I personally believe that early adoption of a digital and programmable euro by the banks could become a great competitive advantage for the European economy. That’s regardless of the other solutions that are still on the table. As a bank, we now have to qualify and quantify the variants of the digital euro: with Sebastian, Thu Lan and our colleagues – be they from payment transactions, strategy or treasury – who are contributing here with great commitment, in addition to their daily tasks. Then we can promote the most relevant solutions and their regulatory requirements in the market, but also via the banking committees.

Thu Lan Nguyen
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Thu Lan Nguyen

Senior foreign exchange analyst, GM-Research

Thu Lan started working in the research department of Commerzbank after completing her economics degree in 2010. Initially, she was responsible for the analysis of Eastern European currencies, but in the following years she expanded her coverage to include other currencies from both emerging and developed markets and is now active as a generalist in foreign exchange strategy.

Sebastian Kraft
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Sebastian Kraft

Senior Product Owner DLT & Blockchain, Group Technology Foundations, DLT Lab

Sebastian joined Commerzbank in 2010 from a large management consultancy. After holding positions in Inhouse Consulting (CBC) and group strategy, as well as managing two departments in GS-ES and GS-OS, he has been exclusively involved in the development of blockchain applications and projects in Commerzbank’s DLT Lab since 2017.

Benjamin Duve
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Benjamin Duve

Head of Digital Assets & Custody, Corporate Clients - Corporates & Markets Advisory Custody

Benjamin has worked at Commerzbank since 2007, starting as a corporate customer advisor. After a project stay in Frankfurt, he advised banks, central banks and sovereign wealth funds in the Gulf States out of Dubai for several years. Since his return, he has been working in Capital Markets and Advisory, where he is responsible for the custody business in the corporate client area. In addition, he is responsible for digital assets, from issue to custody.

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