20 June 2021

FT interview with Fabio Panetta, Member of the Executive Board of the ECB

You are getting close now to a decision on whether to pursue further work on the digital euro. You recently completed your public consultation on this, in which the biggest concerns were about privacy. So how do you address people’s concerns about privacy and still do all the necessary checks to make sure that it’s not abused for money laundering, tax evasion, and all of those things?

If the central bank gets involved in digital payments, privacy is going to be better protected. Why? Because we’re not like private companies. We have no commercial interest in storing, managing or monetising the data of users of a digital means of payment. We’re not a profit-maximising institution, we work in the interest of citizens. So we’re a different animal than private service providers. This also emerged from the public consultation. People feel safer if their information is in the hands of the central bank – a public institution – than if it is in the hands of private companies. Second, there are many ways in which we can protect confidential data while allowing the checks foreseen by law to avoid illicit transactions, such as those linked to money laundering, the financing of terrorism or tax evasion.

How would that work?

First of all, we could segregate the data. Suppose that I have to give you money. I’m the payer and you’re the payee. I would go to my bank, which would know that I’m making a payment and would transmit a code to the payment operator. The payment operator would transfer the payment between one code and another code. It would not know the identity of the payer behind the one code and the payee behind the other. So the payment will go through, but nobody in the payment chain would have access to all the information. But this is only one example. We could use cryptographic codes. It could be possible, for example, to make offline payments for small amounts, in which no data are recorded outside the wallets of the payer and payee. One could imagine that for payments of small amounts – €70 or €100 – you could have offline payments without a connection.

But don’t you need to link back to the identity if you’re going to restrict people to a certain amount? 

For these amounts, one can also imagine that you don’t do that. Why do we want to have all payments traceable? Because there are issues in terms of money laundering, the financing of terrorism and tax evasion. This risk is much lower for small transactions, as long as they are not used to split a larger payment into many smaller ones. We addressed this in past experimentation by introducing “anonymity vouchers”, making it possible to anonymously transfer a limited amount of digital euro over a defined period of time. So the concept is that controls should be cost-effective. For very small amounts, we could permit truly anonymous payments, but in general, confidentiality and privacy are different from anonymity. Full anonymity must be considered very carefully, because there is a trade-off between guaranteeing full anonymity and guaranteeing compliance with fundamental regulations in areas such as anti-money laundering, combating the financing of terrorism and tax evasion. And let’s not forget that citizens will still be able to use cash, which guarantees anonymity. There are many things we can do, with the help of technology, so people feel safe about how their data are used, and at the same time, so a payment can be reconstructed ex post if the police want to assess whether there’s been any illicit activity, any crime going on. But that would not be in line with the incentives of private intermediaries, which are interested in the commercial value of transaction data. We’ve done some preliminary experimentation on how to safeguard confidentiality with national central banks, which will be published. So we’re discussing possible ways to guarantee privacy. Why are we doing this? For obvious reasons and because the message that emerged from the consultation, as you said before, is very clear. Privacy is a top priority for users. 

What about people who say that, while the ECB may not have commercial interests, you are a public sector body? So the idea of the government spying on people by looking at what they’re doing with their money, isn’t that also a concern for people?

I start from the assumption that people should be able to rely on a public institution, and we’ll make sure to set up governance structures to avoid any possible abuse of data. We’ll act within the scope of European legislation, which is the most advanced worldwide in protecting data, with an independent data protection supervisor that we will be interacting with.

Can you tell me a bit more about the experimentation? What does that entail? 

The experimentation we’ve done so far is to get a preliminary sense of the pros and cons of different technologies and the limits of, for example, handling payments while safeguarding confidentiality. In this preliminary phase, we’ve organised four work streams in which we’ve tested the possibility of running a digital euro with a centralised system, a decentralised one, a mixture of the two and with offline payments. If the Governing Council gives us the green light in July, we’ll start a formal investigation phase focusing on the design of a digital euro. After two years, we’ll get back to the Governing Council, and in the meantime we’ll interact with other European authorities and institutions – the Parliament, the Commission, the Council, the Eurogroup – all those who are involved, because the digital euro will require legislative changes. So at the end of these two years, ideally, we would have more clarity on the steps which would be necessary to issue a digital euro, if the decision were taken to launch it. Then we expect to have, by and large, three years to be able to implement what we have decided on, by working together with the technology providers and banks on the end user features of a digital euro so it could be integrated into the services that they’re already offering to their customers. 

Why do you need legislation?

Because, for now, a digital euro is not explicitly foreseen in the European legislation. There are different ways in which you could define the legal basis for a digital euro, depending on its characteristics. Existing legislation may also need to be adjusted to cater for a digital euro. For example, to allow the anti-money laundering authorities to have powers to verify, ex post, not only transactions through bank accounts, but also through the digital euro. 

Let’s take a slight step back. There are still some people who are scratching their heads and saying, what is the problem that you’re trying to solve with this project? What is the point of the digital euro?

First of all, for many centuries, from ancient Greece to the Roman Empire and Charlemagne, the sovereign has always offered money to citizens – sovereign money, which is the ultimate reserve of value for citizens. We’re doing the same. We intend to continue to do so. So why do we need a digital euro for this? There are two reasons. First, people are paying more and more digitally, and less and less with our current means of payment – cash. And second, people are buying more and more online, and with e-commerce it is relatively difficult to pay with cash. So people are using the means of payment backed by the central bank less and less. We’re moving into a digital era, so by introducing a digital euro we would be changing how people can access our balance sheet and use our means of payment.

So it is the decline of cash that you are responding to? But you can pay digitally with electronic money, you don’t need a digital euro to do so. I can already buy pretty much anything I like sitting here with my mobile phone. 

First of all, there is no digital means of payment that you can use everywhere in the euro area, from Finland to Cyprus. ...

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