Central Bank of Cyprus Governor Constantinos Herodotou on Thursday addressed attendees at the 11th Banking Forum & Fintech EXPO, discussing the impact of technology on the financial sector.
Held at Nicosia’s Filoxenia Conference Centre, the event delved into the transformative effects of technology on banking and finance.
In his address, Herodotou highlighted the profound changes induced by technology in the financial landscape.
He explained that the integration of technology into banking processes offers a spectrum of opportunities, promising optimised operations, enhanced customer experiences, and a redefined relationship between financial institutions and their clientele.
Notably, the emergence of fintechs and the looming challenge from big techs have accelerated these transformations, leveraging platforms like social media to influence retail depositors’ reactions to market signals.
“Without a doubt, payments are being challenged by disruptive transformation and by the emergence of private actors that might lead to instability and confusion about what is money and what is not money,” Herodotou said.
“For example, the so-called crypto-assets are too volatile to be considered a currency or to act as a means of payment,” he added, noting that “stablecoins are often unbacked by any reserves to be considered as a currency, but rather seek to maintain a stable value through, for instance, algorithms or protocols”.
He also said that stablecoins are vulnerable to runs, citing the collapse of Terra in 2022, which was the fourth-largest stablecoin at the time.
He also mentioned the failure of Silicon Valley Bank, after investor runs on USD Coin, the second-largest stablecoin at the time.
“As BigTechs are further expanding into digital finance, there are risks to our payment system, as well as to our monetary and financial stability, especially from a potential issuance of their own currency,” he said.
“This is not mere speculation, as evidenced by the decision of PayPal to launch its own dollar-denominated stablecoin,” he added, noting that PayPal has a user base 1.3 times bigger than the Eurozone’s population.
He said that this venture involving stablecoins presents challenges across three key areas.
Firstly, it affects the payment system by creating ‘closed-loop solutions,’ limiting payments to users adopting specific payment tools.
Additionally, if citizens opt for stablecoins issued by BigTechs over central bank money, it risks diminishing the role of public money as the anchor securing the convertibility of bank deposits into central bank money.
This, he explained, could weaken the association between private digital money and the State, potentially eroding trust in the euro area and its monetary control.
Thirdly, he stated that the emergence of stablecoins from BigTechs poses risks to the euro area’s financial stability.
BigTechs, Herodotou mentioned, may not prioritise avoiding disruptions in financial intermediation, maintaining financial sector liquidity, or ensuring fair compensation for all stakeholders involved.
Herodotou stated that the examples of BigTechs’ increasing entry into digital finance are growing.
He noted that Apple’s recently launched savings account, connected to its payment services, provides interest rates exceeding the US average by more than tenfold. Since its April 2023 debut, it has accumulated over $10 billion in user deposits.
Moreover, Amazon now extends buy-now-pay-later options globally. Meanwhile, X (formerly Twitter) is allegedly gearing up to introduce a comprehensive suite of payment and financial services.
“In light of these developments, preserving financial stability is what the central banks prudently do,” Herodotou said.
“Within this spirit, at the European Central Bank (ECB) we consider that making our currency – the euro – available in the digital sphere, is necessary to address the challenges brought by the digital revolution, in order to maintain the role of sovereign money – a public good that central banks manage in the public interest – while securing both innovation in payments and the financial sector’s stability,” he added.
He stated that the ECB aims to introduce the digital euro as a daily-use form of central bank money, enhancing trust and accessibility across the euro area.
With high privacy, offline use, and wide usability, it’s designed to rival other payments, resembling cash’s trust and value, ensuring ECB backing, distinct from typical bank deposits.
“The aim is to make the digital euro inclusive, serving 347 million people in the euro area,” he said.
“It would be free of charge and a truly European solution for day-to-day payments: online, in shops or from person-to-person, with wide usability and accessibility from Finland to Greece and from Portugal to Cyprus,” he added.
He also said that “the digital euro would not be a threat to the role of banks as financial intermediaries”, noting that the “remuneration and quantity constraints per person, would stop the digital euro from competing with banks for deposits”.
Furthermore, the digital euro’s design emphasises its role strictly as a payment method, unlike crypto-assets used for speculative purposes.
Banks, he explained, might play a crucial role in facilitating digital euro transactions, offering front-end services, while the central bank won’t engage directly with end-users.
What is more, Herodotou mentioned that the ECB’s potential introduction of the digital euro after the preparatory and legislative phases aims to tackle technological challenges and bolster Europe’s strategic autonomy.
This digital currency could revolutionise payment systems, offering innovation opportunities for European providers on a scalable platform.
Unlike existing solutions, it would encourage bank-driven innovation, reduce reliance on international payment schemes, and enhance resilience against cyber threats.
He noted that the ECB has concluded a two-year consultation, deciding to ensure wide accessibility through supervised intermediaries.
With the approval of the preparation phase in November 2023, technical solutions and partnerships will be developed, aligning with ongoing legislative negotiations.
This project involves collaboration with policymakers, market participants, and society to refine the digital euro’s design.
“What I have briefly summarised is a very challenging and ambitious project and objective,” Herodotou stated.
“However, I am optimistic that it will ultimately bear fruits and benefits, as our European track record has shown that what seems incredulous now, is tomorrow’s new norm,” he added.
Addressing the initiatives undertaken by the Central Bank of Cyprus, Herodotou said that the CBC is committed to propelling financial digitalisation and nurturing a robust financial landscape to bolster the Cypriot economy.
The first initiative he mentioned was the remote electronic onboarding platform, which aims to streamline client data collection and verification for individuals and corporations.
The phase 1 launch in December facilitates remote customer onboarding and updates via bank apps, reducing physical visits and time.
Successful tenderers met with major banks to plan implementation, with over 90 per cent market share.
Moreover, phases 2 and 3 will integrate utility and government services, expedite onboarding, and ease information sharing between banks, minimising customer efforts for multiple applications.
The second initiative he referred to was the CBC’s Innovation Hub, which engages with fintech entities, fostering innovative dialogues.
“The continued operation of our Innovation Hub, which this year has so far interacted with 10 fintech entities, serves as a portal for an ongoing and constructive dialogue on innovative products and services,” he said.
“The innovation hub is open to new firms as well as incumbent institutions. It is also an important milestone that enables the CBC to achieve its supervisory objectives and priorities relevant to digital operational resilience and cybersecurity,” he added.
Herodotou wrapped things up by saying that “digitalisation is transforming society in ways that would have been difficult to conceive only a few years ago, with profound effects expected in the near future on the way banking and payment services are offered”.
“Emphasising transparency and efficiency is crucial, while shaping an ecosystem where ease of use, transaction speed and cost-effectiveness are priorities,” he added.
“At this significant turn of history, both the Central Bank of Cyprus and the ECB are acting promptly and proactively, in order to ensure that they are well poised to embrace the future,” the CBC governor concluded.