The Governor of the Bank of Italy, Fabio Panetta, made a convincing speech about the dangers of not issuing a retail central bank digital currency (CBDC). While he’s a persuasive speaker, ironically this might be his strongest speech in favor of a digital euro. And he gave it after he left his position as European Central Bank (ECB) leader of the project.
Previously the ECB stated that a key digital euro driver is to reduce the European Union’s dependence on international payment networks such as Visa and Mastercard. The gist is not new, but Panetta fleshed out the details rather eloquently.
Visa, Mastercard and competition
On the Visa and Mastercard front, three key points stood out. Firstly, as money becomes more digital, so does the dependence on card networks that are not EU-based. Secondly, despite the EU introducing Interchange Fee Regulations in 2015, the average cost of card payments is now higher. And within the EU, international card scheme fees almost doubled between 2016 and 2021.
Finally, the European Payments Initiative, originally backed by 31 banks and two local acquirers, gave up on building a Visa and Mastercard competitor. Panetta argued a key reason was the challenge of breaking the Visa/Mastercard dominance. However, he didn’t mention either Visa or Mastercard by name.
He concluded that the current state of digital payments alone justifies the need for a digital euro. However, there’s also the BigTech threat.
Digital currency and the BigTech threat
Panetta also made three points about the threat of BigTech. They relate to increased dominance, privacy and the risk they will launch a digital currency.
Regarding competition, he outlined several examples of tech companies expanding into finance. There’s Apple’s reluctance to enable hardware functionality that would allow competition with its own wallet. Plus, the launch of the Apple savings account. X is planning a full range of payment and financial services. Ant Financial and Tencent are already dominant in China and expanding elsewhere. And Amazon offers buy-now-pay-later funding.
Privacy issues with BigTech are widely known. But there are equally concerns around privacy and the digital euro. Panetta argued that legislation will ensure the central bank doesn’t have access to private data. The Data Protection Regulators say the legal wording in the draft legislation needs to be tighter.
The third issue is the risk that BigTech might issue their own digital currencies, which Panetta referred to as “digital payment instruments.” In his words, these might pose “risks to the functioning of the payment system, monetary sovereignty and financial stability.” PayPal’s stablecoin is one example. He also mentioned the concern about closed loop or walled garden systems.
While Panetta made this point last, we’d argue this one is the true worry. Because stablecoins could let BigTech undermine the power of central banks. Consider how Meta’s Libra/Diem digital currency transformed interest in CBDC from a theoretical sideshow into a key central bank policy objective.
Meanwhile, although Panetta might now be leading the Bank of Italy, the central bank plays a key role in the EU wholesale DLT payment initiatives. It proposed one of the three DLT payment solutions that will be tested next year, alongside France’s wholesale CBDC and Germany’s trigger payment solution.
