Euro goes digital: Key talking points from Siili's Composable Banking Ep. 2

Sointu highlights the project's current phase, the potential costs, privacy concerns, and the impact on banks' competitiveness. Together with Leo, they speculate on how the digital euro could foster innovation and provide a competitive edge in the global market, concluding with Ville's vision for a data-driven bank focused on SMEs. 

Ville's insights and opinions shared during the discussion with Leo are expressed in his personal capacity and should not be construed as representing the official views or positions of Nordea. 

What is the digital euro? 

The Digital euro is envisioned as a public utility for financial transactions. However, it's aimed not at replacing physical cash but complementing it. Ville describes it as a means to provide a public option for currency use, underlining its role not necessarily in daily transactions but as a hedge or public utility that's available should there be a need, reflecting the European Central Bank's (ECB) approach to potentially introduce a digital complement to cash.  

A central bank digital currency is not an entirely new idea. "I think most, if not all the central banks have at least some level of investigation going on at the moment for central bank digital currencies. The most advanced right now is is the Chinese central bank," Sointu adds. 

Why is the ECB considering a digital euro? 

The ECB's consideration of a digital euro stems from several motivations. First and foremost, it aims to enhance financial inclusion, ensure the resilience of the European financial system against digital disruptions, and establish sovereignty in digital transactions. Sointu notes, "It's part of the so-called european Union payment sovereignty agenda, which is very strong in the european Union right now, where they want to make sure that the european Union is resilient." 

Opportunities of the digital euro 

• Digital and financial inclusion. Ville emphasized the digital euro's role in ensuring digital and financial inclusion, particularly for individuals who might be left out by the private sector. This suggests a vision for the digital euro as a tool for broadening access to financial services and integrating underserved populations into the digital economy. 
• Harmonization and standardization. He also discussed the potential for the digital euro to bring about harmonization and standardization across the eurozone, enabling seamless cross-border payments and transactions. This would facilitate easier and more efficient transactions across European countries, enhancing the financial connectivity within the EU. 
• Alternative to private systems. The digital euro could serve as a public utility for individuals, providing a reliable alternative to popular private payment systems. This public option could act as a hedge, ensuring that users have a dependable transaction means even if private systems fail or behave unfavorably. This perspective frames the digital euro not just as another payment method but as a foundational element for financial stability and consumer choice. 

Current situation with the digital euro project 

The digital euro project is in an exploratory phase, with no certainty around its eventual implementation. Sointu clarifies the project's status, stating, "we might not even have a digital euro in the future. That's unclear at this point in time." The current phase involves investigating the feasibility of a digital euro, with the ECB having moved from the investigation to a preparation phase aimed at further developing the project's design and legislative framework. 

• The European Central Bank (ECB) has completed the investigation phase and moved into what they call a "preparation phase," which will last two years. This phase focuses on evolving the design, supporting legal and legislative processes, and aligning the upcoming design, parameters, and rulebooks with market expectations. The ECB is collaborating with the European Parliament, European Council, and the private sector. 
• After the preparation phase, the project will enter "preparation phase two," where actual development of the digital euro will start, based on selected technology providers and design parameters. There is no clear timeline for completion, but it is anticipated that, at the earliest, the digital euro could be available between 2028 and 2029. 

The process of implementing the digital euro involves significant political, legislative, and technical steps, including new laws by the European Parliament and national parliaments. The ECB has yet to decide definitively on launching the digital euro, highlighting the project's uncertainty and the exploratory nature of current efforts. 

The cost of the digital euro 

The development of the digital euro is anticipated to involve significant financial outlays. But outside of the concerns about the cost of implementation, Ville Sointu highlights the active discussions around who will cover these expenses: "Who's going to pay, who's going to cover the capital costs, who's going to cover the operational cost, and then? What will be the price for all everybody involved?" 

Ville Sointu expressed concerns about the significant financial investments required for the adoption of the digital euro, emphasizing the need to update acceptance infrastructure to enable its use across various merchant locations, both online and offline. Sointu says, "from a capital expenditure and then operational expenditure, the major cost elements are related to the acceptance infrastructure. So if you really want to use the digital euro, you need to have some way of spending it at the stores and the merchants."  

The major capital and operational expenditures would involve not only technological updates, such as payment terminals, but also extensive training for those who will support the system. These institutions will face significant investments, potentially exceeding the initial estimates, to build the necessary capabilities, including compliance with KYC, anti-money laundering, and fraud detection requirements. This underscores the complex and financially demanding process of integrating a digital euro into the existing payment ecosystem. Sointu explains: "the bigger cost, at least from a bank's perspective, is that the regulated payment institutions are going to be the so-called intermediaries. They need to be both distributing and accepting digital euro payments, and they need to support the related account infrastructure and, of course, do the KYC processes and add the money laundering and fraud detection. All those responsibilities remain with the intermediaries. And that's a major cost for sure."  

Impact on banks' competitiveness 

Sointu discusses his concerns regarding the digital euro potentially weakening banks' position and competitiveness. He points out two main concerns for banks: the balance sheet treatment of digital euros and the impact on transaction banking revenues. Despite these concerns, Sointu suggests that the ECB intends to compensate payment service providers equivalently to current card payment schemes, aiming to mitigate negative impacts on banks' income from transactions. 

Ville Sointu expressed concerns from the banks' perspective regarding the position of existing commercial banks and the balance sheet treatment of the digital euros: "two parts of concern from bank's perspective when it comes to the position of existing commercial banks. And the number one is the the balance sheet treatment of the digital euros." The digital euro might impact banks' capital available for lending. Sointu continues, "if that amount of capital at the central banks will go down because, again, it's a direct liability between the individual and the central bank. It will not go to the balance sheet of the commercial bank like it does today." He also highlights the potential for the digital euro to not create a financial disaster for the banking sector due to strict limits on the amount one can hold: "even if everybody has the maximum balance, then that's not going to create a financial disaster for the banking sector." 

Privacy concerns 

Privacy concerns are paramount among users regarding the digital euro. Sointu reassures that the ECB is serious about addressing these concerns, differentiating between privacy and anonymity. He highlights that the ECB, responsible for the settlement of digital euro transactions, will not have visibility into individual holdings. This design ensures a level of privacy higher than the current banking system, where the central bank does not monitor who holds digital euros, akin to how cash withdrawals are treated today. Payment institutions and intermediaries know the details of digital euro holders but are not required to share this information with the central bank, maintaining user privacy within the digital euro ecosystem.  

In general, Ville Sointu offered his perspective on privacy and surveillance concerns related to the digital euro, emphasizing the European Central Bank's (ECB) commitment to addressing these issues while distinguishing between privacy and anonymity in digital transactions. Sointu clarifies, "The central bank will not see who holds those balances," indicating a design intent to protect user privacy without enabling full anonymity, thus balancing privacy with regulatory compliance requirements. 

While full anonymity is not achievable in regulated payment systems like the Central Bank Digital Currency (CBDC), privacy is a priority. The ECB has sought public opinion, placing high importance on privacy, especially as it complements the use of cash. Sointu clarifies that in the digital euro system, both the payer and payee need to be identified through Know Your Customer (KYC) processes, ensuring privacy but not anonymity. This approach applies the same rules for crime and fraud prevention that current financial systems use. 

Building a successful bank with 100M€ 

When asked what kind of bank he would build if given 100 million euros, Ville first jokingly says he would get another 100 million. However, he briefly outlines a visionary approach for establishing a bank that would primarily serve SMEs, focusing on "digital trust and efficient cross-border transactions." He emphasizes the importance of a data-driven foundation, stating, "it needs to be built around the exact right team with the right principles from the ground up to be data-driven." Sointu's strategy for the bank would also revolve around addressing the underserved SME segment, proposing a bank that builds "trust bridges" for seamless, low-cost cross-border trade, thereby enhancing the financial ecosystem for SMEs. 

• Sufficient capital is essential. Ville stresses that 100 million euros isn't enough to establish a successful bank. He believes significantly more capital is required. "...according to experience and market data is not enough to build a successful bank." 

• Team-focused and data-driven. The bank needs the right team and a focus on data from the beginning. Sointu says, "it needs to be built around the exact right team with the right principles from the ground up to be data-driven." 
• Understanding legacy banking's shortcomings. Ville highlights a key gap in traditional banking: "the number one thing that is missing from most legacy institutions today is the data-driven facts." 
• Target underserved markets. Ville identifies a clear target market for his bank – smaller medium-sized enterprises (SMEs), especially those dealing with cross-border trade.
• Building trust and facilitating cross-border commerce. Focus on establishing trust and lowering transaction costs for cross-border business. 
• Smart lending practices. Ville emphasizes using data to make informed, lower-risk lending decisions to support these SMEs.

How to stay up to date with digital euro developments 

Ville Sointu mentions several sources for information on the digital euro and related topics: 

Ville Sointu's links

• Nordea Bank: https://www.nordea.com/en/
• Fintech Daydreaming Podcast: https://fintechdaydreaming.com/
• Ville Sointu's LinkedIn profile for personal updates and insights on CBDC and related topics: https://www.linkedin.com/in/ville-sointu/

Central Banks & Regulatory Authorities

• european Central Bank (Digital euro): https://www.ecb.europa.eu/paym/digital_euro/html/index.en.html
• european Parliament & european Commission (legislative processes around digital euro): https://eur-lex.europa.eu/
• National Central Banks (e.g., Bank of Finland): https://www.bof.fi/en/

Industry Organizations

• Bank associations (country-specific)
• European Banking Federation (EBF): https://www.ebf.eu/