Figure 1: Why the ECB wants to introduce a digital euro

Source: ECB

Britta Döttger: If I may jump in. I am a bit worried to hear that B2B payments currently don’t play a role for the ECB. To enable digital business models, improve speed, enhance security, lower cost of, and improve cross-border payments, we need a vision for B2B payments as well. For Europe, introducing a smart, digital euro could be a great foundation of innovation while safeguarding European sovereignty and reducing the dominance of foreign payment service providers. 

Jochen Siegert: To clarify, the ECB has not ruled out opening the digital euro for B2B payments. However, it is thinking in phases and will therefore start with retail payments.

 “The ECB is very clear that the digital euro must deliver a perceptible benefit to the consumer compared to the status quo”
Jochen Siegert, Head of Asset Platforms at Deutsche Bank and Member of the Digital Euro Market Advisory Group of the European Central Bank (ECB)

Why is this the case? Does the ECB believe that the value-add is higher for B2C payments than for B2B?

Alexander Bechtel: I think one important reason for this is that central banks need to limit the risk for the commercial banking system. If consumers hold CBDCs as a direct replacement for physical cash that’s not a problem. But if they withdraw bank deposits and store the money in their central bank account instead, this could become a threat to financial stability. Today, about 90% of the money that is circulating are bank deposits. With the introduction of a retail CBDC this relation could revert – especially if CBDCs will be used for large-scale B2B payments.

“At Roche, our goal is to integrate the physical supply chain with the financial ecosytem where payments are truly made end-to-end”
Martin Schlageter, Head of Treasury Operations at Hoffmann-La Roche

Martin, over the past few years Roche has spent a lot of time centralising and standardising its payments processes. From your point of view, which incumbent payment systems problems could CBDCs solve?

Martin Schlageter: As a cash manager you are working between two worlds: the physical supply chain where we buy from our suppliers and sell to our customers, and the financial world where payments are made. At Roche, our goal is to integrate these two worlds end-to-end. That’s why we have recently launched a proof of concept together with Deutsche Bank to automate and integrate the order process via smart contracts until the payment to the supplier. Up to now, order intake, checking of invoices, establishing bank data and initiation and approval of payments are sequentially done in different systems. In the future, we want to increase efficiencies in the purchase-to-pay process and eliminate costly and error-prone reconciliation steps. We strongly believe that token-based CBDCs are ultimately the best way to accelerate and improve the last step in this chain; in other words the payment.

But wouldn’t that be possible with incumbent payment systems as well?

Martin Schlageter: For a start, it could be. In our PoC, we are drawing on so-called payment triggers to connect the blockchain platform that we use to make payments with our existing payment systems. However, this can only be an interim solution. From our treasury perspective we want to strengthen our business models and therefore we need to be as close to business processes as possible. We believe that a programmable CBDC best meets this requirement (see Figure 2).

Figure 2: Smart Contract PoC using Blockchain and Digital Payments (click to enlarge)

Source: Roche

Britta Döttger: Moreover, cash on chain transactions would also help to prevent payment fraud, as payment data originates from the blockchain and could only be changed if all parties agreed to it.

Alexander Bechtel: I agree, CBDCs are the best solution as they allow for frictionless automation. However, from our experience, payment triggers solve about 99% of the blockchain use cases we are currently observing in the corporate spaces. In a nutshell, these triggers are bridging the gap between blockchain platforms and existing payment systems such as SEPA or SWIFT. This allows companies to seamlessly include and automate payments on their trade finance, procurement, billing or Internet of Things platforms. Furthermore, the question is who should put cash on chain: Do we really need central banks or aren’t commercial banks better positioned to offer this service?

And what’s your view on that?

Alexander Bechtel: I believe this is a service that banks should offer their customers. From my point of view, they are more innovative and closer to the corporate world, which allows us to tailor solutions to our clients’ requirements. This is something that central banks wouldn’t be able to do, and it is not their mandate.

Britta Döttger: I agree, and I still see a role for central banks, given that we don’t need different solutions from each bank. With central banks on board, there is an opportunity to develop global standards around cash on chain. Up to now, I see few banks that are as active as Deutsche Bank in this space, which is why I would be reluctant to leave it entirely to the private sector to bring cash on chain.

“We face the challenge that a token-based currency needs to be scalable, fungible and interoperable to deliver benefits. It’s a tough task as it requires close coordination across the banking sector”
Alexander Bechtel, Head of Digital Assets & Currencies Strategy at Deutsche Bank

Alexander, do you expect progress with respect to getting cash on chain?

Alexander Bechtel: Yes, I think we will see progress over the next months and years. But let me explain why the banking industry isn’t moving quicker when it comes to bringing cash on-chain. We face the challenge that a token-based currency needs to be scalable, fungible and interoperable to deliver benefits. It’s a tough task as it requires close coordination across the banking sector. At the same time, we need to make sure to adhere to new regulation such as the Markets in crypto-assets Regulation (MiCAR). We are working on it – as Deutsche Bank and as an industry.

For cross-border payments via CBDCs coordination is also needed on a global level. Which initiatives should corporates be aware of?

Alexander Bechtel: The Bank for International Settlements (BIS) is working on a wholesale CBDC to increase the efficiency of cross-border payments. The idea is to build a multi-CBDC system which follows a single set of rules, a single technical system and would essentially lead to the creation of a new multilateral payment platform. However, this is a very complex model as it requires solid cooperation among central banks; so we won’t have this up and running any time soon.

But if put in place, what would that mean for SWIFT and the current corresponding banking systems?

Britta Döttger: If this becomes reality, I think it would be an alternative to SWIFT and existing clearing systems. Such a payment platform would not only allow for messaging but also for settlement. From a corporate point of view, it would be great to have such a system.