The pandemic has accelerated the digitalisation of many aspects of our lives. Will the euro follow?
Today, the National Bank of Belgium publishes its Financial Market Infrastructures and Payment Services Report 2021, covering a wide range of current, relevant topics from the activities of BigTech companies in the retail payments ecosystem and proposed regulation on crypto-assets to an analysis of a potential digital euro and enhancing digital operational resilience of the financial sector.
Our country plays a key role in the global payments landscape. Belgium hosts a number of international financial market infrastructures (FMIs) such as SWIFT and Euroclear, which act as critical nodes in the smooth functioning of Belgian and international financial markets and payment services. Belgium is also an important location for institutions that provide payment services under the PSD2. Their number has only increased since the announcement of Brexit as some UK institutions decided to re-locate their European business to our country.
The NBB’s Financial Market Infrastructures and Payment Services Report contains an overview of the regulatory changes and supervisory activities in 2020 with regard to financial market infrastructures, custodians, payment institutions and critical service providers. One major event that marked 2020 was of course the COVID-19 pandemic, which affected these systems and institutions in various ways. Some institutions, such as central securities depositories and custodians, saw increased transaction volumes thanks to the volatility in the markets, while others, such as money remitters, were negatively affected by government measures such as the lockdown in March 2020. Sometimes, the impact proved to be temporary (e.g. the market volatility in March), while other changes, such as consumer preferences for contactless payment solutions or online shopping, are expected to be more permanent. Cyber security has been a priority for the Bank for many years, but since many financial institutions implemented working from home, cyber resilience has even become more important. The Bank has set up a program for the ethical hacking of financial institutions (TIBER-BE) and has drawn some lessons from its experience so far, which are further described in a thematic article. Other articles are dealing with new European regulatory initiatives, such as the Digital Operational Resilience Act (DORA) and Markets in Crypto-Assets Regulation (MiCA).
Considerations for a potential digital euro
Recent evolutions in the area of crypto-assets have caught the central banks’ attention as widespread adoption of stablecoins could affect the effective transmission of monetary policy among others. Therefore, central banks have started to investigate the effectiveness of a central bank digital currency (CBDC). A thematic article provides more insight in the future scenarios in which a digital euro could be a viable option to achieve the central banks’ objectives, the key design decisions, the trade-offs to be considered and the next steps in the continued analysis of the potential issuance of a digital euro. When designing an attractive payment instrument, three fundamental questions should be considered. Should a digital euro earn interest? Should access to and/or holdings in digital euro be restricted? Should digital euro holdings and transactions be private? The design choices also have an impact on the central banks’ objectives. If the interest earned on a central bank digital currency is too attractive, commercial banks may lose a source of cheap funding and may increase interest rates on loans they provide to the economy. Unrestricted and easy access to a risk-free asset such as a CBDC could potentially facilitate bank runs. Furthermore, there is a trade-off between privacy – a priority for prospective users of a digital euro – and the need to reduce the scope for criminal activity. Therefore, any future decision will be taken after consultation with the different stakeholders in a digital euro – including prospective end users and supervised intermediaries.