Member of the Executive Board of the ECB about bitcoin bubble, central bank digital currencies, instant payments and fintech impact on banks

Interview with Benoît Cœuré, Member of the Executive Board of the ECB, conducted by Liwei Wang on 17 December and published on 30 December 2017

Section dedicated to Digital currency and fintech

What do you think of Bitcoin?
What we are witnessing today is clearly a bubble, made possible by scarcity and by an expected sequence of gains which investors believe will be sustained, irrespective of the fundamentals. That is the definition of a bubble.
Bitcoin is not a currency. Investors should not believe that they will be able to use it as a means of payment. It is a speculative investment. There is a risk of large capital losses which investors should be aware of. So the main concern related to Bitcoin is not a monetary one but one that relates to investor protection, and possibly also to tax evasion, money laundering and criminal finance.

With two American exchanges (CBOE and CME) introducing Bitcoin futures, how do you see the policy for it going forward?
The ECB is not a securities regulator. Regulators worldwide have recently warned investors repeatedly about possible losses. In Europe, the Fourth Anti-Money Laundering Directive, adopted by the European Council and the European Parliament last Friday [15 December 2017] requires exchange platforms and wallet providers to report suspicious transactions and identify owners of digital currencies. I’m quite sure that further steps will be taken to regulate this market.

How do you see the prospect of central bank digital currencies?
This is an area where central banks tread with great caution, because different jurisdictions face different trends in the demand for cash, and because we have to assess the full impact of any change in the way we operate, both for the citizens of our countries and for the structure of financial intermediation. In that respect, I would make a clear distinction between wholesale and retail applications.
Starting with wholesale markets, we see that distributed ledger technology (DLT) has a lot of potential for market infrastructures. All major central banks are looking into it. The Committee on Payments and Market Infrastructures (CPMI) of the Bank for International Settlements, which I chair, published a report on it in February 2017.
The ECB has undertaken a pilot project with the Bank of Japan in this area. We concluded that the technology is not yet mature enough to migrate large-value payment systems – in our case, TARGET2 – to a DLT-based infrastructure, but we’ll continue to study it carefully.
The question will arise as to whether central banks could at some point provide central bank money to financial market infrastructures in a digital form. We are still in the early stages of that discussion, but it is a relevant one.

Is this similar to the real-time gross settlement (RTGS) renewal programme under way in the United Kingdom?
Indeed, the Bank of England sees potential benefits from DLT for future RTGS systems, although, like us, it believes that this technology it is not yet sufficiently mature. But we will continue to look into it.
As for the retail side, that is, central bank digital currencies replacing banknotes and coins, we are much more prudent. First, there are only a limited number of countries where demand for cash is clearly on a downward trend.
Sweden is faced with such a situation, but in the euro area we are not. We are therefore not being pushed to go in that direction.
Second, we also have to consider the implications for security and trust in the currency. Today, we invest a lot of resources in fighting the counterfeiting of banknotes. What would fraud, and fraud combat, look like in an environment with a digital currency?
And third, we want to make sure that we fully understand the long-term consequences for the financial system. Today, most of the money used in the economy is created by banks. How would digital money affect the role of banks as financial intermediaries, and would it make the financial system more, or less, stable? These are issues on which much more reflection is required, hence our great caution.

How does the ECB’s new TARGET instant payment settlement (TIPS) initiative factor into this?
This is actually my last point. A lot of the current interest in central bank digital currencies, or private digital currencies, stems from the fact that people expect them to be faster and cheaper than existing means of payment. These expectations can be easily met by upgrading existing payment systems.
That’s true for domestic payments, and it is exactly what we’re doing in Europe with TIPS, an infrastructure allowing for 24/7, 365-day instant payments. TIPS will go live in November 2018.
It’s also true for cross-border payments. But here we are less advanced. One reason why Bitcoin is popular is because it allows for cross-border payments that are cheaper and faster than with existing infrastructures. The international community has a duty to get together and act to improve the speed and cost of cross-border payments, to avoid being taken over by technologies such as Bitcoin, which entail risks for their users, not to mention possible fraud and crime.
In China, private sector non-banks are also becoming disruptive players in the payment space.
In Europe, we have a new legal framework for payments entering into force in January 2018, called the Second Payment Services Directive (PSD2).
Under this revised framework, payment service providers (PSPs) can be non-banks and will have access to the bank accounts of their customers, but at the same time they will be regulated, not only in terms of financial stability but also in terms of data use and privacy. Opening up the payments market is good for consumers and it will spur innovation, but it should not come at the expense of privacy and security.

How do you see technology and tech firms’ impact on banks and the financial structure?
In a nutshell, fintech creates opportunities for non-bank actors to become players in the financial services sector. It has the potential to significantly destabilise the banking system or at least to erode its profitability.
Bear in mind that PSD2 is designed to introduce more competition by requiring banks to share data that they today use to cross-sell financial services. With access to such data, fintech companies could for instance increasingly capture the value formerly retained by banks.
I see two broad scenarios. In the first one, banks rise to the challenge, cut costs, internalise new technology, including by purchasing fintech companies, and gain new sources of revenue. This scenario crucially assumes that banks are profitable enough to carry out the necessary technological investments.
In the other scenario, banks fail to internalise fintech and run the risk of becoming mere platforms, with all the value being created outside. This could happen in particular if digital giants, who already have access to large amounts of customer data, start targeting parts of the banking value chain, ultimately crowding banks out of large swathe of financial services.
Firms and households may then benefit from new financial services and products, but the stability of the banking system would be at stake, and regulation would need to be carefully reviewed to close any loopholes.

What role can central banks or regulators play in this?
We need to stick to a very simple principle: equivalent activities should be regulated in an equivalent way. For instance, if we see non-bank players starting to provide credit, they will need to be regulated in an equivalent way, although not necessarily the same way, giving different deposit-taking restrictions.
And since all these activities are cross-border, we need international coordination. The right forum for this discussion is the Financial Stability Board, where Chinese authorities are active participants.

Source: ECB