Home Digital Currencies German banks set out vision for digital euro design

German banks set out vision for digital euro design

The German Banking Industry Committee has set out detailed thoughts on the design of a digital euro in a policy paper | Credit: xuuxuu; Pixabay

Germany’s banking industry’s largest association has for the first time laid out its vision of the design of a digital euro, proposing the European Central Bank (ECB) widen the focus of its central bank digital currency (CBDC) explorations to include further innovative forms of digital money.

As the ECB prepares to announce whether it will step up its preparations for a potential digital euro, the German Banking Industry Committee (GBIC), collectively representing more than 1,700 banks, published a policy paper this week (5 July) proposing an ecosystem of digital money made up of three key elements: retail CBDC for private use; wholesale CBDC for commercial and savings banks; and tokenised commercial bank money for use in industry.

Germany’s banking industry sees a digital euro as ‘key to strengthening Europe’s digital and monetary sovereignty and ensuring the continent’s medium and long-term competitiveness’. The global trend towards CBDCs is ‘unmistakable and represents both an opportunity and a challenge’, the report states, adding that more advanced payment solutions developed by the banking industry will also play a major role in the future in addition to CBDC. In order to create payment solutions to complement CBDC, tokenised commercial bank money should be issued and existing payment systems should be geared to distributed ledger technology (DLT)-based business processes.

Concern over ‘disintermediation’

The Bank for International Settlements (BIS) set out its recommended approach to fundamental elements of CBDC design just a couple of weeks ago. Its update focused on retail CBDCs, describing them as a ‘more far-reaching’ innovation compared to wholesale CBDC.

BIS stated that CBDCs would best function as part of a two-tier system where the central bank and the private sector ‘work together to do what each does well’. The central bank would operate the system’s core, ensuring its safety and efficiency, while the private sector, such as banks and payment service providers, would innovate and actually serve customers.

In the GBIC’s 83-page report ‘Europe needs new money – an ecosystem of CBDC, tokenised commercial bank money and trigger solutions’, the German experts see retail CBDC ‘primarily as a complement to cash’. By enabling its use in programmable applications for citizens, banks could help increase its attractiveness, GBIC states. 

The report issues a warning about possible negative consequences for businesses and consumers, if retail CBDC is not carefully designed: ‘Unrestricted introduction of retail CBDC could result in disintermediation of banks. This, in turn, could lead to a decline in lending capacities, increase the cost of financing for businesses and thus profoundly impede economic growth for the foreseeable future’.

The authors propose citizens should be able to hold a wallet containing a limited amount of CBDC at a bank of their choice. Without committing to a concrete upper limit themselves, they refer to representatives of the ECB as having suggested a sum of €3,000.

Exploring the wholesale side

The GBIC authors also suggest the ECB explore the possible introduction of wholesale CBDC ‘in order to fully exploit the advantages of DLT in the capital markets’. Yet they add that adjusting the existing TARGET2 (the Eurosystem’s real-time gross settlement system) architecture to meet the requirements of DLT-based capital market transactions might actually be a faster solution than introducing wholesale CBDC: ‘This would allow the creation of dedicated, private-sector settlement systems that can rely on liquidity deposited with TARGET2, thus giving participating institutions a high degree of security.’

Offering up another solution, the report references the ‘Blockbaster’ project, which was launched by the Bundesbank (central bank) and Deutsche Börse (stock exchange) in 2016 and aimed to create a conceptual prototype for a blockchain-based transfer and settlement of securities and cash. The idea is to expand TARGET2 to include a specific form of trigger solution: ‘As demonstrated by the Deutsche Bundesbank’s “Blockbaster” project, this can create an intelligent interlinking of payments in central bank money with DLT-based asset transactions’.

In March, the Bundesbank and Deutsche Börse joined forces with the Deutsche Finanzagentur (finance agency) to continue the work started on the Blockbaster project by successfully testing a settlement interface for electronic securities. Their research demonstrated that it is possible to establish a ‘technological bridge’ between blockchain technology and traditional payment systems to settle securities in central bank money without creating a CBDC.

Tokenised commercial bank money

To complement the two forms of digital central bank money, the GBIC suggests tokenised commercial bank money be made available by commercial and savings banks as another potential addition to the ecosystem. The authors write this could facilitate transactions based on ‘smart’ – automated – contracts and thus increase process efficiency while also meeting corporate demand arising from Industry 4.0 and the Internet of Things.

In order to ensure widespread use and implementation of such tokenised money, the report describes support from policymakers and particularly the ECB as essential: ‘Any ECB digital euro project should provide for a discussion forum to foster a standard for tokenised bank money developed by the banking industry.’

In the context of programmable payments, the report sees a ‘general challenge’ in the automation of payment initiation and the frameworks governing civil and payments law, adding that there is a need for legislative initiatives to promote machine-controlled legal transactions in the long term.

“Increasing process digitalisation and automation will provide completely new opportunities for Europe’s enterprises,” said Joachim Schmalzl, executive member of the board of management of the German Savings Bank Association (DSGV), which is currently lead co-ordinator for the GBIC, in a press release. He added that it was now up to the ECB to define the necessary framework to enable Europe’s banking sector and economy to make “reasonable use” of these opportunities.

As well as the DSGV, the other associations that are part of the GBIC are the Bundesverband der Deutschen Volksbanken und Raiffeisenbanken (BVR), for co-operative banks; the Bundesverband deutscher Banken (BdB), for private commercial banks; the Bundesverband Öffentlicher Banken Deutschlands (VÖB), for public-sector banks; and Verband deutscher Pfandbriefbanken (vdp), for mortgage banks. 

In 2020 the BdB argued that a programmable euro would be an important innovation to secure Europe’s long-term competitiveness in a paper titled: ‘Europe’s answer to Libra – potential and prerequisites of a programmable euro‘. Meanwhile the DSGV’s chief economists emphasised how societal effects need to be carefully considered before introducing digital central bank money in ‘Central Bank Digital Currency: Curse or Blessing?‘. The VÖB looked into the prerequisites and implications of programmable digital central bank money in a working paper titled ‘Digital Central Bank Money (CBDC) for Europe – Risk and Opportunity at the Same Time’.


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Account-based CBDCs built on digital ID are way forward: BIS‘ – our news story (23 June 2021) on the Bank for International Settlements setting out its recommended approach to fundamental elements of CBDC design, stating a preference for account-based systems built on digital ID

Bank of England sets out five CBDC ‘core principles’‘ – our news story (9 June 2021) on the Bank of England (BoE) setting out a quintet of ‘core principles’ that will form the backbone of its explorations into a potential CBDC

Sweden’s e-krona testing enters next phase‘ – our news story (2 June 2021) on Sweden’s central bank teaming up with one of the country’s biggest commercial banks and a Nordic IT services provider as its testing for a potential CBDC takes a step into the ‘real world’

German authorities champion blockchain-based securities settlement‘ – our news story (30 March 2021) on German financial authorities successfully testing the use of DLT to settle electronic securities in a trial involving six major international banks


Global Government Fintech organised an international webinar, in partnership with Amazon Web Services Institute (AWSI), entitled ‘Delivering Central Bank Digital Currencies (CBDCs): Exploring the Technology Challenge’ on 22 April.