As with many institutions, the European Central Bank is considering how to modernize central bank money. One way to do this is to issue a retail CBDC or central bank digital currency. This would make a digital version of central bank money available to the public. A retail CBDC would complement the physical form of widely available central bank money that we know and love today, which is physical cash or banknotes.

Many central banks around the world have been exploring a retail CBDC, and the live examples include Nigeria, China, India, and the Caribbean, specifically the Bahamas, which was the first country to issue retail CBDC, and Jamaica. The ECB has also for years been researching and exploring this topic and is preparing to issue a pilot of its retail CBDC, the digital euro, in the second half of 2027.

In this episode, Nicola Branzoli, Head of Division for the Digital Euro Regulation, Research, and Technical Support at the Banca d’Italia, joins Glenbrook’s Ashley Lannquist and Simon Skinner for an in-depth exploration of the digital euro. Listen in as they cover the objectives and value proposition, design choices and pilot details, and what the digital euro means in the broader European payment context.

Watch the full episode on YouTube: 

Episode Transcript

Welcome to Payments on Fire, a podcast from Glenbrook Partners about the payment industry, how it works, and trends in its evolution.

Ashley Lannquist: Hello everyone, and welcome to another edition of Payments on Fire. In this episode, we’ll be going into depth on the digital euro project. As with many institutions, the European Central Bank is considering how to modernize central bank money. One way to do this is to issue a retail CBDC or central bank digital currency. This would make a digital version of central bank money available to the public. A retail CBDC would complement the physical form of widely available central bank money that we know and love today, which is physical cash or banknotes.

Many central banks around the world have been exploring a retail CBDC, and the live examples include Nigeria, China, India, and the Caribbean, specifically the Bahamas, which was the first country to issue retail CBDC, and Jamaica. The ECB has also for years been researching and exploring this topic and is preparing to issue a pilot a retail CBDC in the second half of 2027.

For listeners who regularly tune into this podcast, we briefly introduced the digital euro and some of its considerations in an August 5th episode on EU payments regulation. We’ll be going into more depth on the digital euro in this episode, which is of course dedicated to the topic.

My name is Ashley Lannquist, and I’m an Engagement Manager at Glenbrook Partners. I’ve been researching and advising central banks on the topic of CBDC since 2018, originally at the World Economic Forum, at the International Monetary Fund, and now at Glenbrook.

I’m joined in this podcast by my co-host, Simon Skinner, Associate Partner at Glenbrook.

Simon: Hello, everyone. Welcome to this edition of Payments on Fire, which I’m sure will be a very, interesting exploration of the digital euro. We’re looking forward to kind of getting into it.

Ashley Lannquist: And we have a special guest today who’s in the middle of the action contributing to the digital euro project within the Eurosystem. Nicola Branzoli, Head of Division for the Digital Euro Regulation, Research, and Technical Support at the Banca d’Italia, which is the central bank of Italy. Nicola, it’s a pleasure to have you on this podcast.

Nicola Branzoli: Thank you, Ashley. Hi, Simon. Hi, everyone. I’m happy to be here. Thanks.

Simon Skinner: Great. Well, before we sort of dive into the digital euro and explore numerous elements and aspects of that, there’s a question that we like to kind of ask all our guests that come on the podcast, and that is, briefly explain to our listeners how you got into this world of payments. I think every guest we ask this question to has a slightly different story. Don’t think any of us woke up when we were 18 and said we want to have a career in payments. We’ve all kind of coalesced into this space. So it’d be great to kind of hear your story.

Nicola Branzoli: Yeah, so, I joined Banca d’Italia, the Italian central bank, about 15 years ago after a PhD at the University of Wisconsin, Madison. At the time, I joined the research department, I was working on financial stability, everybody was working on capital requirements and Basel III after the great financial crisis.

So I was the new guy with a PhD from the US, and so boss told me, “So there’s this buzzword called fintech, so why don’t you study it and then tell us what we need to know while we are figuring out other stuff on Basel III and so on.” So started to study the topic, and I also joined some policy groups, mainly at the global level, so the Financial Stability Board, the BIS, the Bank for International Settlement, the CPMI, some group also with the IMF. So I look both at, let’s say, the conceptual aspect of it and also the policy side of it. We also had many meetings with fintechs from everywhere in the world.

And I, since the very beginning, I understood that fintech is a lot about payments, right? Payments is one of the, let’s financial industry in which technology plays probably the biggest role. It’s one of the main one. And so I got into Bitcoin, DLTs, fast payment system, big tech, CBDCs. I wrote one of the first speeches of then deputy governor in 2017 about the digital euro. And so I got into topic. Then I thought about doing another sabbatical, doing a sabbatical year, so I joined MIT. And then when I came back from the sabbatical year, I joined the team working full-time on the digital euro and here I am.

Ashley Lannquist: Very nice, Nicola. Thank you. Nicola, so on the digital euro side, can you tell us about the project at a high level? What it is, why it’s under consideration and development, and what it would mean for Europe?

Nicola Branzoli: Yeah. So I think there are two ways of answering this question. So the first one is a very practical one, and another one is a sort of more high level. So I’ll give you both because I think they give a broader perspective on the topic. So first, I think that one of the main objective of the project is to have a digital version of banknote.

So that means that we’re, that the digital euro is going to be a public means of payment that works everywhere, all the time, and for all the use cases. So there’s a lot of confusion about this, so I’d like to take some time to talk about it because people say, “Oh, we already have a lot of means of payment, so why, we don’t need another one?”

Well, so that’s true, but none of the existing means of payments work for all the use cases, right? So for example, right, if I want to give person to person transaction, I want to give five euros to my daughter, or I want to give five euros to Simon. So in Europe essentially, I need, we both, me and Simon, my daughter need to be customers of the same bank. So I’m with bank A and Simon with bank B, I can’t give it right away if I do. So I can make a bank transfer, but I cannot give him five euros right away that he can use it for whatever he needs.

In the US, for example, you have things like Venmo, Zelle. But also in that case, it doesn’t work all the time. For example, when I was in Boston, my landlord, so the bank of my landlord wasn’t part of Zelle, and I had Zelle. So when I needed to give him $5 for the table that I bought as a furniture for my apartment, I was unable to do that. I had to wait until the end of the month, and to give him my rent and add the $5 for the table.

Of course, the solution for P2P transaction, person-to-person transaction, don’t work when I go to a merchant. Most of them don’t work when I go online. This solution don’t work, for example, in all the areas when there’s not an internet connection. These are all online solutions, and so if there’s not an internet connection, I cannot use it. Means in the area when there’s not a connection or during times when there’s not an internet connection, for example, during natural disasters. Cash clearly is an option that we can use all the time. But because it’s physical, payer and payee need to be in the same place when they want to exchange it. So I cannot give it right now to Ashley because we’re not in the same place. I cannot use it for online commerce and that’s obvious.

So there is not a single solution that covers all the cases. So all customers, all people like me, individuals, have to jump from one solution to the other whenever they are making, during the same day, right? And that’s the practical, the practical answer. The more high level answer is that money is, it’s not just an asset, right? It’s a symbol of unity, it’s a symbol of identity, it’s a symbol of sovereignty. And in Europe, we have had one currency, the euro, since, almost 25 years now. And we have one single market for wholesale pay, right?

So all banks can exchange money between each other everywhere in the Eurozone. When it comes to retail payments, so the payments that people do every day, that merchants receive every day, we have 21 different markets, and they are fragmented and separating from one another. So the example is that if I have a card issued in Italy, that card is not gonna work, is not gonna work in France. So it has to go to a global network in order to work in France. So if it was in the US, it was like a bank from New York, a card issued in New York, it doesn’t work in pennsylvania just because the two banks use different standards or, and sometimes use also different infrastructure.

So after 25 years of trials, we need a solution that sort of bring together all the different markets. This fragmentation clearly have a lot of ramification because retail payments is an important thing as you definitely can imagine. And it is particularly so in this period, in this day and age. So, what the digital euro is gonna do is to provide a means of pay, the digital payment solution that is gonna work everywhere, in all the 21 countries of the Euro area.

Ashley Lannquist: Thank you, Nicola. And may I just ask, is the SEPA instant credit transfer scheme falling short of this unity in paying a credit card from Italy in France, or are they complementary approaches?

Nicola Branzoli: So, it’s a fair question. So, you have to keep in mind the concept of use cases, right? So the SEPA instant credit transfer, they work when I want to make a credit transfer. But if I go to a restaurant, I could make a credit transfer. It can be instant, right away, but generally the restaurant doesn’t have a way of providing me all the information that I need to make that payment right away. So the SEPA works just for bank to bank, bank account to bank accounts. But bank accounts to bank accounts payment are not used to buy a coffee, to go to a grocery, to transfer money that can be instantly used by any other people.

So it’s the concept of use cases. For essentially, for everything that is related to sales, credit transfer don’t work. I can go to a dentist and pay with an instant credit transfer. That can work because he’s gonna accept it. He’s okay receiving the money at the end of the day. But again, the restaurant, it’s not gonna be able to accept it. We could have, of course, introduced some requirements for them to do that, but that would’ve been sort of very complicated because we’re gonna, I guess we’re gonna talk about this, but we need standards, right? So we need rules to make all the payments work everywhere.

Simon: So if we kind of stick with the broader high-level vision for the digital euro, it’d be great if you can help us understand, our listeners kind of understand some of the kind of key aspects of the value proposition for the different stakeholder groups. You talked a lot about kind of ubiquity for end users, but it’d be great if maybe you could help everyone kind of understand what it’ll mean for banks and payment service providers and other financial institutions, what their role will be in the new ecosystem.

Nicola Branzoli: Yeah. You want to understand the digital euro project, you have to understand that the digital euro is made of three things. It’s an asset, so there is a liability of the balance sheet of the central bank, okay? As opposed to bank deposits, which are liabilities of a bank. Okay. Then there is an infrastructure. So we’re meaning, we’re talking about data centers, cables, connectivity services. So the physical infrastructure that transfer the information that are needed, transfer the from the digital euro account of Nicola to the digital euro account of Ashley, for example. Then we have the standards. So when financial institution exchange information, so, I don’t know, the ID of Nicola Branzoli and the account number, the digital euro account number of Nicola Branzoli, they use a standard to exchange that information. No? So the digital euro is all, it is made of these three things.

It’s an asset, fine. That’s probably the sort of the simplest concept. Then there is the infrastructure that is gonna work everywhere, and there are the standards. And right now, we are in a situation in which there aren’t- so for most payments, and you also have to keep in mind the standards depends on the way you start a payment or receive a payment.

So for example, the NFC or the QR codes. These are different way of initiating a payments, and these have different standards. So for example, for QR codes, there is not a single standard that works in all the Euro area, in all the countries in the EU. But not even, there are not even standard that work in some countries, right? So a merchant can use a different standard than another merchant if his PSP provides a way to accept payment to a QR code.

Another example is NFC, right? So just to make a other practical example. So I have a card that was issued in Italy, and through global networks, they work also in the US. My card, if I put it in the POS, it works in California. But if I use the NFC, it doesn’t work because the NFC standard that are available in Europe, even with the global network, are different from the one that are used in the US. So if I put my card on a POS in the US, it’s not gonna work. I need to put it inside the machine.

We are creating, of course, we are creating the asset, we are creating the infrastructure, and we are creating the standard. And what’s important is that the infrastructure and the standard will be used or will be available for free to all the PSP and the banks that will distribute the digital euro. So essentially, they won’t, the banks won’t have to pay all the fees, the settlement and scheme fees they currently pay to the networks they use because these services will be provided by the Eurosystem, and the fees will be waived. These are real savings for the banks.

So for example, on average, these settlement and scheme fees can eat as much as half of the merchant service charge that merchants pay to their acquirer. Another benefit for the banks will be that they have an infrastructure that instant, an infrastructure and standards that work instantly everywhere in the Euro area.

So when they develop a new product or even with their current services, a payment service they provide to their clients, they can give to their clients these services without going through or making any deal paying any fee, to the, let’s say, the technical service provider that provide them all the services that are necessary to arrive to other countries. So essentially, they are waiving a lot of the costs that they currently incur to provide payment services across the Euro area.

And finally, of course, I don’t know if it’s obvious, but it’s gonna be important. Only banks and payment service providers that are licensed in the EU will be allowed to distribute the digital euro. So banks and payment service, European payment service provider will be the sole distributor and will maintain the relationship with their clients.

So I don’t wanna say that it’s gonna be a free lunch for everyone. What I’m saying is that we are designing an infrastructure that is made to support banks’ business model and to support their, let’s say, their innovation and their ability to reach all the European market.

Simon Skinner: Nicola, I just wanted to maybe come back on an observation you made about ubiquity and standards. You mentioned, you know, NFC and I think mentioned QR codes, and the fact that there’s no current kind of Europe-wide standards. As part of this, is that envisaged that those standards will be created?

Nicola Branzoli: Yeah. For example, so the ECB just, so one of the principle for developing the standard and the infrastructure, so the practical aspect, let’s say, to taking away the asset, is that we’re gonna try to reuse as much what’s already available out there. So for example, a few months ago, I think it was in April, the ECB signed an agreement, with, CPACE and Nexo and other European standard in order to make them available, compatible with the digital euro, available everywhere in the Euro area.

So we are using as much as we can what’s existing, and we’re developing, wherever, whenever there is not. For all the kind of payments that there’s not, we don’t have a standard right now, we are developing new ones that will be, say, rollout available, everywhere in the Euro area. So that in practice means, so it’s the meaning of the word, we are developing the rails, that’s gonna allow all the intermediaries to provide in Europe to provide their services everywhere

Simon Skinner: Great. Thanks. We’ve touched a bit on the banks, PSPs, financial institutions. How about from a kind of consumer and business perspective? How will they interact with the digital euro? How will they hold and store it and then use it on a day-to-day basis?

Nicola Branzoli: Yeah, So I think the best way to answer that question, I think, is to go through, let’s say, the user journey, right? So first of all, all the banks and some types of payment service provider will be required to distribute a digital euro, which means that, Nicola Branzoli, I’m gonna make an example with me just to make one, can go to any bank in Europe and ask, “Can you open me a digital euro account?”

So the bank will open me that account. Of course, if that’s my existing bank, let’s say the bank with my, with whom I have my current, non-digital euro bank account, I won’t go through a KYC, so standard AML checks that need to be done whenever there’s a new relationship between a financial intermediary and a customers.

If it’s a new one, there will be standard KYC procedure. Then, so after that, so let’s say it’s my existing bank. I just go there. They’re gonna open my digital euro bank account, and that’s gonna be for free. So opening, closing, maintaining, or transferring a digital euro bank account will be free.

Then on, just to make a concrete example, on the app of my bank, I will see my current bank account, €50, digital euro bank account clearly zero at the point I just opened it. My bank will also provide me a way to pay to use the digital euro So a card and an app that is gonna work, for example, on my smartphone. Then I can link, if I want, my non-digital euro bank account and my digital euro account so that I can use it.

I can use my digital euro bank account as a pass-through wallet. What does it mean? It means that even if I have, let’s say, five digital euros, and I need to pay a T-shirt for €10, when I pay, if you decide to pay with the digital euro, there’s gonna be an instant transfer of €5 from the non-digital euro to the digital euro bank account in order to have 10 digital euros and then pay with that. We call that the water. So there’s gonna be waterfall services between the two accounts so that the user experience will be smooth, right?

Simon Skinner: That waterfalling, or that sweeping is kind of a fundamental part of the model, so that as you say, the digital euro account becomes, I think your language, a pass-through wallet. So it’s not designed to be a store of value kind of in the same way that a traditional bank account would be.

Nicola Branzoli: Exactly. Because there’s gonna be holding limits. I think we’re gonna talk about that later. But that’s an important part of the user experience, that remains good even there are gonna be limits on the amount of digital euro that a user can hold.

So another thing that I can do is to register my smartphone or any device that can be used for payments, even a card. So some card also have, say, the technical capabilities to be used offline. So I can use, register a device, let’s say a smartphone. I’m gonna register my device, so I can use that to pay offline. So paying offline means that when I am connected to the internet, I can download some tokens, some digital euro tokens from my online account to my smartphone.

So it means that now the smartphone app, sorry, the tokens are on my phone. If I lose the phone, I lose the money. But I can use the tokens on my phone even without an internet connection. So we call that an ATM in my pocket. Let’s say that I’m going up on a mountain. While I walk, I can download a hundred euros to be sure that I can pay when I’m at the top. I can buy the water, even if there’s not a connection.

Another important aspect is that offline payments will have the same level of privacy as cash. So they, payer and payee will need to be in the same place to exchange offline tokens. But only then, so only the payer and the payee will be aware of the payments and who is involved and the time the payment was done. So the privacy of the offline solution will be the same, will be the same as cash.

Then there will also be a ECB app, let’s say a neutral app that can be linked to any digital euro account. That app will provide, let’s say additional services for inclusion. People with disabilities, people with visual impairments or hearing impairments can decide to use that app, which will meet the highest standard of inclusion as defined by the European regulation. So essentially, the user experience will be the same as the current payment solution, but it will be through something that can be truly used everywhere.

Another important thing, for example, is that the digital euro account will have a number, a code, and that code will not change if I change bank. So I can register my digital euro account number on my movie platform. I’m not gonna mention names here. And if I move my account one bank to the other, that payment will remain the same and will continue to work. So I don’t have to adjust it if, in case there’s a expiring credit card or I move my bank account and so the bank account number changes.

Simon Skinner: Yeah. That aspect of having the same identifier, unique identifier, does that in essence limit an individual to having just one digital euro account?

Nicola Branzoli: No, just laughing, making a joke. So at the beginning, the Eurosystem was more keen to allowing just one account just for practical reason. It would be easier, right? Just keep it. You can move it from one bank to the other if you want, but it’s sort of easier to, let’s say, check the holding limits and all this sort of stuff.

But then, of course, that decision, is made by the, within the regulations, so by the European co-legislator. And they, let’s say they made it more flexible. So anyone can have as many digital euro account as they want with as many PSP as they want. Of course, we’ll go back to there is a holding limit, an overall holding limit. Let’s say one thousand, three thousand, five thousand, one million, whatever it’s gonna be when we talk about this. But these holding limits will have to be across multiple accounts if I have multiple accounts.

Ashley Lannquist: And to something that you said a couple minutes ago, a user can choose to have a digital euro wallet, from the ECB, and they can hold their funds there, although is it still basically distributed by a PSP bank, or they can hold it within a wallet at their PSP or bank? Although, of course, the funds would still be a liability of the central bank. Is that correct?

Nicola Branzoli: No, the second one. So the relationship between the customer and let’s say, the digital euro account is always through a PSP. The Eurosystem, meaning the ECB and the national central banks of the Eurozone, won’t never have any direct relationship with the client. So the relationship is always between a PSP, let’s say a bank, and the customer, right? The account, let’s say the liabilities is a liability of the central bank but the account essentially, or the interaction between Nicola Branzoli and his account at the central bank is always through the PSP. If Nicola Branzoli choose to use the app of his bank, fine. If Nicola Branzoli choose to use the app of the ECB, still, the app of the ECB is distributed by the bank.

So it’s the bank that is sort of managing the exchange of information between Nicola Branzoli and the digital euro account, the ECB balance sheet.

Ashley Lannquist: Great. Almost like holding cash in a vault in a bank, right? It’s still the liability of the central bank, but it’s held by your bank relationship.

Nicola Branzoli: Exactly.

Ashley Lannquist: I wanted to get out front of the timeline of the digital euro pilot as well as, I know that the digital euro has not been 100% confirmed by the relevant EU bodies, I think the parliament. Could you please clarify the timeline on the approval for a potential fully rolled out official digital euro as well as for the pilot in 2027?

Nicola Branzoli: Yeah. So, I mean, there are two pipelines here, right? So one is the regulation, which is decided by the co-legislator, so the European Parliament and the European Council, and the commission sort of helping them reaching an agreement. And the practical work of developing the infrastructure by the Euro system and the banks connect to the infrastructure. So the practical, let’s say, aspects of distributing digital euros. So, let’s say, all the co-legislator, all the co-legislators are committed to have a final text of the regulation by the end of this year. And there’s no doubt about it, essentially. So few months ago, it was still under discussion, although there was a strong commitment. Right now, I think there’s no doubt that they have to finish, they want to finish, by the end of 2026. Just to give you an idea, the trialogue, which is the final part of the discussion, has started like three days after the parliament complete this text. So mid of July. So they’re really going very fast to finish it. So we’re gonna have most likely, it’s not decided, but everyone is 100% committed, and we’re gonna have a regulation by the end of 2026. Then we need at least a couple of years to make sure that all this, all the infrastructure work.

So here we’re talking about, thousands of banks and PSPs, in Europe that have to be ready, from the large one to the small one, from the most advanced to sort of the more traditional institutions. They have to be ready to distribute it, and it has to work, to work well. So there’s gonna be at least a couple of years for everyone to be ready. So the timeline here is that we have a regulation by the end of let’s say the 1st of January, 2027, then the actual, issuance of the digital euro will happen in 2029.

In parallel of this work, the Eurosystem needs to be ready and also the market needs to be ready for the rollout. So we have started to work for a pilot. So we selected the PSP, the banks, and the acquirers, and the technical service provider that are gonna participate to the pilot. We have started to work in July, and the initial transaction of this pilot, which will be real time, real world transaction. So I’m gonna buy a coffee, I’m gonna buy a T-shirt, I’m gonna buy something online, will be in the second half of 2027 and will last 12 months. So it will be between the second half of 2027 and second half of 2028.

Simon Skinner: And for that pilot activity, I think there’s certain kinds of focused use cases, and maybe a set of users or customers that are gonna be involved in that. Maybe you could just expand on how that pilot’s gonna operate.

Nicola Branzoli: Yeah. So, for pilot, we adopted a family and friends approach that is generally used also by the industry. So we’re gonna have, let’s say few tens of thousands of individual users, and they will all be employees of the Eurosystem. So they will be employees of the ECB, Banca d’Italia, Banque de France, and so on.

So the order of magnitude here is twenty, thirty thousand individual users spread everywhere, essentially, in the Euro area. We will have a few tens of merchants, so a restaurant, a cantina, a few websites, and we will also test the e-commerce, again, everywhere in the Euro area.

So we have essentially four objectives for the pilot. Yeah, so we need to, essentially, first of all, test the infrastructure and the interaction of the digital euro infrastructure with the PSP backend systems. Then we need to, let’s say optimize the model. So especially about the interaction between bank systems, the Eurosystem system. There is something that we can improve in order to reduce cost and improve performance of the infrastructure. We have to test the go-to-market strategy, and we have to validate the subsequent rollout.

There’s gonna be four main use cases. So there will be person to person online, which means that, Nicola Branzoli can transfer money to an employee of Banque de France, right away, wherever he is. There will be P2P offline, so me and my colleague in Roma can exchange money just putting together our two smartphones. And then there will be P2B, so person to business, online at the store, so through POS, the point of sale machines. Then e-commerce, essentially. So there will be few e-commerce website that they will participate with our pilot, and when Nicola Branzoli goes there and buy something, he will be able to use digital euro.

Ashley Lannquist: Okay. If we’re all set with discussing the pilot that’s going to come out next year with the ECB and participating staff, let’s move on to the broader, the digital euro concept in terms of the design of it. We’ve discussed holding limits. I believe the proposed one and what you’ve said so far is around 3,000 euros holding limit, and if you hold multiple accounts, those can still also only cap out to 3,000 euros, if that design is finalized. Nicola wants to chime in.

Nicola Branzoli: Yeah, absolutely. So let me just take some time to explain this idea of holding limits. So the problem, the issue that we want to address is that if there’s too much money moving from the balance sheet of banks to the balance sheet of the central banks, that could create funding problems or increase funding costs for banks.

So we don’t wanna have too much wealth moving from the banking system to the ECB, which, from a conceptual perspective, we wanna limit the store of value function of the digital euro and just make a means of payment. So something that is used to pay, but not something that is used to store wealth, let’s say, for a long period of time.

So in order to do that, there’s gonna be a holding limit. So every individual, will be subject to a cap. But again, a cap on the holding limit is not, so the amount I can hold is not gonna be a cap on the amount I can pay, because there’s gonna be a waterfall that we talked about, which will allow me to pay 5,000 digital euros, even if the holding limit is €50, just an example.

The precise holding limit has not been decided. So we don’t, it may be one euro, it may be one million. A lot of people have talked about three thousand as a sort of a reference number to keep in mind, but it’s not been decided, and it will be decided later, let’s say, closer to the moment of issuance.

What is almost decided is the methodology that the Eurosystem will use to set the limit. So there is a, the ECB published, I think about a year ago, let’s say, a primary, an initial version of a methodology that has been developed to assess the potential impact of the liquidity position, the liquidity position of banks by the introduction of the digital euro. That methodology sort of provide an assessment on various measures of liquidity across the euro area for all banks. And that methodology will be used to set an holding limit that essentially doesn’t make the digital euro impact nil.

I think there’s a lot of buzz on this topic or a lot of discussion that the digital euro can create a liquidity problem for banks. But I think the discussion is overlooking the fact that central bank has no, let’s say, has no reason to create any liquidity problem with the system. And ultimately, the central bank is the ultimate provider of liquidity for the banking system. So there is not gonna be, for sure, any liquidity problem related to digital euro. Because again, that’s not what we’re, we don’t wanna solve one problem to create another one. And again, that one is under the umbrella of the central bank.

Ashley Lannquist: And the planned interest rate paid on CBDC balances is zero as well, as I understand it, right? And that would also, at least not create an incentive for people to store value, as you say, in the digital euro?

Nicola Branzoli: Absolutely. That’s written in the regulation and there’s no discussions about it. So the digital euro is a digital version of cash. Cash doesn’t pay any interest. The digital euro won’t pay any interest.

Ashley Lannquist: And for listeners, I was at the IMF for several years doing a capacity building with central banks on this topic, and the central banks can design their retail CBDC in many ways. We’re hearing that the digital euro is very cash focused, potentially low value accounts, no interest rate, no intention to disrupt the liquidity of the commercial banks or PSPs and very functional as a, cash option, including this offline capability that’s very valuable.

But other central banks may choose different designs. So they may pay a small interest rate, may have higher holding limits, may make other types of design decisions about the CBDC, and that would be towards meeting different goals. For instance, some may want to promote actually competition to the banking sector if it’s too monopolistic, and the CBDC can provide some viable competition there, in a way that’s welfare-improving for the public.

So we see different designs in different countries, and each country evaluating CBDC would start with its major goals, like what we’ve heard from the ECB here, and then design accordingly.

Nicola Branzoli: Yeah. So if I may add to it, I totally agree. So the point here is that, CBDC is designed by a central bank, and a lot of flexibility in deciding the characteristic of a CBDC depending on on the economy or on the status of the country where it’s issued.

That’s why, to explain sort of the day-to-day work of my group, we’re spending a lot of time talking with banks, PSPs, with various business model, association of consumers, associations of merchants, largest merchants, small merchants. So we are meeting essentially all the stakeholders and you understand, so everybody here understands that the stakeholder of money is essentially everyone, right? To hear their needs and try to find sort of the right balance such that we can improve, the, let’s say, the current retail payment market in Europe without harming anyone. So there’s a lot of, let’s say, relative to other projects by central bank, there’s a lot of stakeholder engagement and relationship with, and hearing, and discussion, and debating with all the stakeholders in order to design something that is truly for the market.

Ashley Lannquist: Great. and would you like to provide a comment on any other design choices that you may be, that the Eurosystem’s still working through or that you personally are working on, before we shift gears?

Nicola Branzoli: Yeah. So, all in all, I think that some things are clear, right? So for example, we’re gonna have the online and offline digital euro. So PSP banks and PSP will be required to distribute the digital euro. The digital euro will have legal tender, so every merchant, with some exception, but minor, a minor exception, will be required to accept it. There will be three basic services for users. So as I said, essentially opening or closing and using a digital euro will be free for users. There will be a cap for the fees that are paid by merchants. So something that I haven’t said yet is that all merchants, all acquirers will provide to their merchants a way to accept the digital euro. Merchants will pay a merchant service charge, but that merchant service charge will be capped, and the cap will be lower, essentially, just to simplify, lower than the merchant service charge for existing digital means of payment. The reason is, as I said at the beginning, the Eurosystem is provided services for free to the scheme and settlement services for free to the PSP, to the banks. And some of these savings that are financed through public money should go also to merchants who are required to accept it because of the legal tender. So these are the things that are almost essentially decided.

What are not decided yet are the, let’s say, the precise implementation, and the devil is in the details, so that’s something that’s gonna be worked out in the coming months. So how these caps will be set, the timing of the rollout, for example. So there is, there’s a big debate of, I think more than 30 use cases for the listing for the digital euro. The question is whether all the 30 use cases will be available, say, 2029, or whether there’s gonna be a gradual, rollout over time. And other things that need to be decided, for example, is the concept of FRAND, so fair and reasonable access, to the secure element of the devices. So essentially, the conditions under which, a PSP can access the secure element of my smartphone and then allow me to pay, with digital euro using both online and offline using my device.

Simon Skinner: Thanks, Nicola. Sounds like a number of things that will keep you and many others in the Euro world busy for the months ahead. I’d just like to maybe kind of return to a topic that we briefly discussed sort of at the beginning of our podcast today. And that was thinking about the digital euro in the sort of broader context of other payment systems and payment solutions across the European region. And so, as we sort of look across the region and we think about what’s happening in the payment space, we see some other EU-wide initiatives like the collaboration between EPI and their WERO payments proposition, and the European Payments Alliance to create a Pan-European payment network, based off instant payment. And so I guess the question that we have is, how should we think about sort of that initiative, and the digital euro? So should we think about them as being competing rails, or should we think about them as being kind of additive, and supporting each other?

Nicola Branzoli: The two, let’s say, initiatives, so the private ones and the public ones, are going, to support each other. At least we are all working also with EPI and EuroPA such that the two initiatives can support each other.

So just to make a concrete example. So these are private solution that essentially are based, just to simplify a little bit, but are based on a national card scheme. It’s not, I’m cutting some corners here. It’s a complicated, it’s a complicated system. But essentially EuroPA is an interoperability solution between the national card scheme in Italy and in Spain and in Portugal and in other countries. And EPI provides a wallet called Wero that works in Germany, in France, and in other, let’s say, country in the northern part of Europe.

So even these solutions don’t have the standards that work everywhere in Europe. So the discussion that we have had at the beginning of this conversation, if there’s no European standard for QR payment or if there’s no free standard for NFC, it’s not that this solution will be able to develop the standards that will be instantly roll out everywhere in the Euro area. Consider there are 13 countries of 21 in the Euro area that don’t have a national card scheme.

So for example, in Ireland or in Finland, just to make two example, there’s no local solution there. So any private solution has to either make an investment to go there make a partnership with the global networks that already have a distribution network there. So what we’re saying is that the private solution like EPI and EuroPA can leverage the infrastructure, can leverage the standards that will be available for free also to them, clearly, to provide their services and to reach those countries that right now they cannot reach because there’s not a way of reaching them.

So that’s why we are also working with them. We’re meeting them regularly to understand how we can integrate and create synergy, or let’s say, design the digital euro in a way that can support, also these solutions. So again, they are two layers of a common endeavor of providing, or building a truly Pan-European, retail payment.

Simon Skinner: Yeah, that’s great. And so, the potential for the sort of harmonization of standards may then streamline the kind of end user experience, and, again, make it kind of more consistent across the Euro region.

Nicola Branzoli: Exactly.

Simon Skinner: Very good.

Ashley Lannquist: And if we think about the broader, about Europe, there are EU countries who are not on the euro, Sweden, Poland, others, and then there you have neighbors of course, that are not EU and not on the euro, like Norway. How can we think about interactions with the digital euro, in those contexts?

For instance, there was a new report from the Central Bank of Norway that, like many countries in their position, are thinking about the potential impact of a digital euro for their country, and I noticed they wrote, of course, they don’t expect the euro to all of a sudden take over in Norway. They have incredibly strong economy and currency, but maybe the digital euro would be accepted in the capital city in some areas, or in tourist areas where they have a lot of Europeans. How is the Eurosystem thinking of those dynamics?

Nicola Branzoli: Yeah. So, first of all, there’s a lot of collaboration among central banks within the Euro area in general within sort of this area of the world. So we are constantly also discussing with them potential issues and understand, prevent, any consequence. Let me just go to the practical aspect of it. So first of all, a merchant, let’s say in Sweden, that doesn’t have the Euro, also part of the EU. To accept the digital euro, the merchant have to have a relationship with a PSP that is licensed in the Eurozone, right? So they cannot get a digital Euro account through their bank in Sweden. If they want to, there has to be an agreement between the Swedish Central Bank and the ECB.

So it must be the Swedish Central Bank that says, “I want to allow my intermediaries to distribute a digital euro in my country,” and so we make an agreement with the ECB in order to sort of see how it can be done. So that means, essentially, that, yes, there could be situations, like with cash, that I go in Sweden and there’s a merchant that can use it because he has a relationship with a Eurozone bank.

But in general, there be restrictions to do that. If we go to, and that’s also true, for example, for Denmark, just to make another example, which is part of the EU. If we go outside the EU, the agreement has to be even at the higher level. So there has to be an agreement between co-legislators of that country and the European co-legislators.

So the parliament and the Consilium, the European Council, have to agree on how to regulate, let’s say, the distribution of a digital euro to that country. So this sort of strong, let’s say, regulation of the distribution of the digital euro outside the Eurozone, we think it’s a strong guarantee that if it’s used, it’s always under the agreement of the authorities, of the countries, where it’s used.

Let me just mention here that what we are doing, what the ECB, the Eurosystem in general is doing that to promote cross-border, we are linking the faster payment system. We mentioned them, right? So instant payments. So the faster payment system of Europe, of the Eurozone, which is TIPS, with the fast payment system of other countries. So we’re not saying you’re gonna use the euro. We’re saying the best way is to be able to make a fast payment, let’s say, between the Euros account in the Eurozone and Sweden. And then if Sweden wants to allow the digital euro to circulate, then it will discuss it and we decide the rule together with ECB.

Ashley Lannquist: Okay, thank you. that’s fascinating, and we are at time roughly. This is a tremendously vast topic that covers many elements, and I think this is a really, interesting discussion that hopefully our listeners will also find interesting. And I’m wondering, Nicola, do you have any kind of final point that you wanted to make or a message you wanted to get through to our audience, before we wrap up?

Perhaps, what would you say to someone who you met at the coffee shop who’s skeptical about the digital euro, instance? Or another point about design that you wanted to get across.

Nicola Branzoli: Well, I think I’m gonna ask you if you have another episode because I think there are so many things that we need to cover on the topic. No, just a joke. But yeah, I think it’s a fascinating topic and there’s a lot of things that we need to discuss. So we, especially through the years, we heard a lot about, a lot of skepticism about the project, which is, which we take it seriously, right?

So we think, there is many, there has been many expressions like a solution in search of a problem, or we already, no one have ever asked a for a digital euro. Or there are already many ways to pay, why do we need a digital euro? So we’ve heard that, and we take that criticism seriously. but We push back a little bit on the way arguments that are, we think, are little bit simplistic.

So first of all, we have a fragmented retail market in Europe, that’s a problem. It’s not clear what are the long-term consequences of that fragmentation, are for the European Union, especially again, in this day and age. So that’s a real problem that we need to solve.

Merchants, small merchants pay for the merchant service charge three or four times more than a large merchant, and their fees have doubled between 2018 and 2022, and are increasing. So they keep on increasing. So especially small merchants pay a lot to accept the digital euro payments. They do ask for a way to pay a reasonable amount and to stop the increase in fees.So they don’t ask for a digital euro, but they do ask to pay less.

People do ask for simplicity. They do ask for a payment solution they can have one that they can use all the time, right? They don’t ask for a digital euro because they don’t know, they don’t care what the solution is, but they do ask for simplicity. A lot of needs are out there, there are plenty of solution, each one trying to solve one problem. We’re thinking where the, we think public money banknotes should remain relevant. They have been relevant for thousands of years. They should continue to be relevant. And we’re designing the next step of public money just to address this issue.

It won’t be a panacea. We understand that. But it will be, let’s say, the reference point for the market to improve and to provide better services.

Simon Skinner: Nicola, thank you so much. And thank you so much for joining us on the podcast today. We will continue to be watching the progress of the euro, the digital euro, from the other side of the pond, very, very avidly.

So it has reached that point where we need to kind of wrap for today. Thanks once again, Nicola, for your time. You’re welcome back on the podcast anytime. We will probably need to revisit what’s going on in the next 6 months. To all of you listening, thanks for joining us. And until next time, keep up the good work, and bye for now.