A blog post from the European Central Bank (ECB) discusses the importance of resilient payment mechanisms. While the report focuses on legacy systems, it also mentions novel blockchain-based technologies like the digital euro.
Published on April 28 and authored by Fabio Panetta, a member of the bank’s executive board, the report highlights that the continuity of payment systems is a critical task for the central bank, especially in times of crisis.
The traditional competitor to blockchain technology
The report focused heavily on praising the Target Instant Payment System (TIPS), launched in November 2018. This instant payment network launched by the ECB provides a settlement layer for commercial banks.
If adopted on a large scale, it would allow businesses and people to transact with each other instantly and with no weekend or business hours limitations. Panetta wrote:
The system is still new and only the Swedish central bank pledged to implement it by 2022. Panetta also mentioned similar systems for settling large scale bank transactions, named Target2, as well as Target2 Securities. These systems are currently being used to settle financial transactions in Europe, and reported a relatively stable performance as demand rose due to the Coronavirus-induced market crash in March.
The digital euro as nationalization of online payments
Panetta noted that the lockdowns made safe and low-cost electronic payment solutions even more critical than before.
The European financial system relies heavily on banks to provide peer-to-peer money transfers. Despite improvements in cross-border friction with the Single Euro Payment Area (SEPA), they suffer from all the drawbacks of a traditional system.
Retail payment services are served by U.S. companies like Visa, MasterCard and PayPal. This predominance seems to be making the ECB uneasy, with Panetta noting:
“Even before the outbreak of the pandemic, the ECB stressed that Europe must be able to supply fundamental services such as electronic payments autonomously.”
This statement also mirrors the distrust toward Facebook’s Libra, which triggered a wave of hostile responses from European regulators.
In light of this, the European Central Bank is studying solutions that would create homegrown systems to handle both brick-and-mortar and ecommerce payments.
The digital euro is being assessed as part of that initiative, with Panetta noting that the Covid-19 experience will be considered when studying its viability.
Panetta however emphasized that the digital euro “should not discourage or crowd out market-led initiatives aimed at introducing private electronic means of payment.”
Whether that statement is intended for decentralized crypto or more traditional companies remains to be seen. It is worth noting that the EU has been relatively lenient in handling cryptocurrency regulation, but crypto adoption would likely be seen as an even bigger threat to financial sovereignty.