PAYMENTS SOVEREIGNTY

Michael Salmony 0:12

Hello, my name is Michael Salmony and I'd like to welcome you to some special edition of the Trilogue where we want to do a shortened version of what we normally do and just amongst us three just to keep everybody busy during the summer period. And the first topic that we've chosen is sovereignty. Sovereignty, of course, is a big topic that we need to become more independent of others. And some like Javier have some very strong opinions on that. So Javier, why don't you kick us off on that?

Javier 0:42

Okay, thank you and good morning. ⁓ Well, sovereignty, I know that I said that sovereignty and the sovereignty debate, I termed it as a red herring. But I think we need a couple of definitions. If I consult Google, sovereignty is the supreme authority within a territory or a state. It refers to the right and power of a state.

to govern itself without external interference encompassing the ability to make and enforce laws, control its own affairs and interact with other states on an equal footing. So yes, when we talk about sovereignty, it's a very strong concept, very complex, very political one. And when applied to payment systems, I think it leads to confusion. And that's why I termed it ⁓ a red herring. A red herring, again, a definition from Google,

is the logical fallacy of a literary device that draws attention to a misleading or irrelevant concept, point, sorry, to distract from the main issue. And that's what I think is happening with the use, the misuse of the concept of sovereignty when applied to payment systems. If you don't like literature and you prefer cinema and movies, it could also be termed as a MacGuffin. It helps to create a debate.

but it is not central to the resolution or to the overall meaning of the debate.

Michael Salmony 2:16

Can you explain that? Because I thought you, the point that you were making is that sovereignty is actually an important topic. We do need to become more independent, for example, of US solutions, but our reaction is wrong.

Javier 2:24

Peace.

It is. The underlying meaning

is important, but I think the concept itself does not fit with the problem, and focusing on sovereignty will distract us from the main point, is resilience and efficiency of the payment systems. And I think mixing political issues with technical ones is not ⁓ usually a good thing. After ⁓ having... ⁓

defined sovereignty and the red herring and all that. If it is sovereignty, I would ask who feels his or her freedom is restricted? Which is the foreign power interfering in the Europe's sovereignty? What rights are being affected? That would be the... If you say sovereignty is at stake, then you have to define what precisely is at stake, who is threatening

and what's the risks we are running. So what I think we really are referring to is to the lack of diversity of payment instruments at the POI. And that's a completely different story, which I would accept. Yes, maybe in some aspects or in some respects, there is a lack of diversity and we would be better off if we could enjoy a wider option at the POI. But that's another matter not having to do with sovereignty.

But if we talk about

Michael Salmony 3:58

I

I just contradict you there, Javier, because I don't... The way I've understood the debate is that there's a fear, especially now with the new US administration where you don't know what's going to happen tomorrow, that we are too dependent on foreign actors.

It's not that we don't have enough choice. In fact, maybe we have more than enough choice. And we also have no problem with resilience. Those are not the topics. It's dependence on foreign actors and their vagaries. But you don't seem to be accepting of that.

Javier 4:21

could be.

That's a fair point. But why

do we focus on a special aspect and not in others? For instance, why do we not talk about sovereignty of operating systems on mobile devices? All payment instruments will reside on a mobile and we do not talk about sovereignty of operating systems of ⁓ those devices. Core banking systems, are they European? Are clouds European so that all actors can

Use a European cloud. I know there is ⁓ a ⁓ an initiative trying to push European clouds, but So far we don't know of anybody using European clouds. So why do we select? Why do we choose some aspects that we think are painful and others which may be even more relevant with they are not applied that that sovereignty issue on them, but I do agree that that

there might be some risks attached to the dependency on certain issues at the POI or some other ⁓ realms in the payments. But let's focus on that.

Michael Salmony 5:38

And I think

you make a very good point, Javier. I mean, the dependence is not only in payments. We're also dependent on our mobile devices, the internet, know, Cisco routers are everywhere, you know, so we are dependent in all. But what we talk about here and what our domain is, payments. So we're only looking at how is total retail payments more sovereign. That doesn't mean we shouldn't also look at the other ones, but that's not our topic.

Javier 5:45

on many other.

Both them, but

payments rely on core banking systems, payments rely on the operating systems of mobile devices, so they are all connected. So we shouldn't choose just one aspect if we are talking about sovereignty in its real size. There is also a ⁓ mixture with the concept of ⁓ criticality, because a system is critical, sometimes it needs to be more sovereign.

does not affect the criticality. think last time we talked about the last blackout that happened in Portugal and Spain and I said all that it was a blackout, fully sovereign. So the fact that there is a critical system sometimes has nothing to do with sovereignty. It may be critical, it may be running some risks, but sovereignty will not help overcoming those risks. So again, there we need to be very clear.

A monopoly can be very sovereign, but it's a risk by itself because it does not provide any redundancy. So we may be very European, but if we rely on a European monopoly, that wouldn't be a good solution. And that's why I always say, well, to me, it's a nightmare if we had to rely exclusively on cash maybe or on digital euro as the only option being very sovereign, but not being my understanding the ideal solution.

Michael Salmony 7:28

I think Ralf will be pleased with that, right? He doesn't see CBDC as being the only alternative, right? Ralf, maybe you can contribute bit.

Javier 7:33

But it would be fully sovereign. It would be very, very

sovereign. ⁓ What I think is that it is misused because ⁓ what we are told is that because there is a lack of sovereignty, there is a need of regulation. Because there is a lack of sovereignty, there is a need to launch the digital euro. That's to me a logical fallacy. It's a non-secret. Not because you have that, the other follows logically.

And when you criticize that and you say, well, I don't think the regulation will be the solution. I don't think the digital euro will be the solution to that sovereignty problem. You are being accused of not being a good European. And that's what I think is a ⁓ misuse of the concept of sovereignty. Not because you are against something you need. You are going to the premise. It's just the consequence that you are criticizing. And in my case, it's what I'm criticizing.

But again, what I worry.

Michael Salmony 8:32

Maybe we should let Ralf say something to that Javier. Because I think we're agreed that CBDC isn't the right reaction to the sovereignty issue. I think we agree on that. But Ralf, you have a particular...

Ralf Ohlhausen 8:34

Thank

Javier 8:35

Okay.

Ralf Ohlhausen 8:37

you

Yes,

I mean, it is, is, I guess it would be one solution, but it is not the only one solution. And it has sort of not been the reason for starting the project in the first place. So it's now coming up as a, as an argument because of Trump two, and another consequence there, but it is. ⁓ Yeah, this wasn't the reason for doing it. ⁓ but I

I do see the sovereignty problem. I think it came up back in Trump one with, you know, payments, ⁓ especially about sanction lists and like the big card networks not being allowed to do any payments anymore.

And if we don't share the same sanction list to the US, then we'll have the discrepancy. we may want to make payments to, I don't know, Iran, Iraq, for some reason, which the US may not do. So if we diverge on those sanctions, then we'll have the sovereignty problem. And the other one is, ⁓ yeah, well, if... ⁓

If anyone puts, well, either a one would shut them down for Europe or would put high tariffs on on Visa MasterCard PayPal, which, you know, is not out of imagination these days. So what then? Now, firstly, let me highlight that we already have European payments sovereignty and it's thanks to wait for it. Open banking.

Because open banking, well, open banking is the only electronic payments method currently in place under European sovereignty that can reach all and every one single payment account in Europe. That's all 400 plus million payment accounts. People can use it.

Michael Salmony 10:23

I would have thought you would say that.

Ralf Ohlhausen 10:50

They can use it right away. They don't have to get onboarded or sign up or get some account or whatever, because all they need is that payment account, which they have already. And also on the acceptance side, it's easy because open banking is basically offered by all acquirers, by all these platforms, et cetera. So merchants could just basically turn it on if they want to. So it is there.

And it's the only one that is there. And it's the only one that will be there for the foreseeable future. Because ⁓ the newer projects like EPI and EMPSA and all of that, well, we've discussed it here many times, it'll take years to get anywhere close. you probably will never get to all payment accounts in Europe. ⁓ So you'll have some countries, you'll have maybe a third, maybe half.

can reach maybe half of the consumers, but that's already a challenging target for like a five years, 10 years plan. For now and for the next decade, I believe open banking is the only viable, the only existing real alternative. And by the way, talking about sovereignty also from another ⁓ angle, it is also a, it's a decentralized structure. And thanks to the decentralized structure,

It has a very, very low ⁓ attack surface. you have, ⁓ it is basically very resilient against ⁓ cyber attacks or even physical attacks because we have like, you know, 300 or something TPPs accessing 3000 banks. So

in with individual APIs all bilateral. So it's a completely decentralized infrastructure that you just can't attack or destroy like in one go. It's like, I think half a million or so connections actually. And so therefore, I think we have that sovereignty. And I want to make another point on how to make sure that other alternatives can be built for that. But back to you now.

Michael Salmony 12:53

So those are very strange things. Hang on a minute, before we...

⁓

Because before we stack up too many questions, you've given two really strong arguments of why Europe could build a fantastically sovereign infrastructure based on open banking because it's distributed, you can already access everybody's account. So the question surely is, why aren't we doing that? Why isn't EPI based on open banking? Why aren't seven initiatives happening using that? Why is everybody doing differently?

Ralf Ohlhausen 13:25

Yeah, well, we have, you know, what

we have discussed that here, we had EPI on the show. And, and the answer was, well, it's not good enough. The APIs are not good enough. So we have to expand on that. And of course, a PSR PSD3 now is a great opportunity. And the very, very last we should do is try is weakening it, which is what's currently happening. So because if ⁓ the council position

the trilogue is going ahead and if they would prevail, would basically weaken, would be big steps backwards on open banking and everyone is focusing there on other issues, fraud, liability, which are of course big topics, but open banking is currently not at all really being discussed in this trilogue or not yet. Anyway, so I have my hopes, but I also have some points on how to

Michael Salmony 14:12

Except.

Ralf Ohlhausen 14:20

achieve sovereignty without ⁓ becoming ⁓ what's the word in a non discriminatory way. Because here in Europe, you know, we're we're not really on a in the spirit of like protectionism of the market, we want to be open and we can be open. And well, I'll come to that in a second. But giving back to you first.

Javier 14:49

But then I think you agreed that ⁓ sovereignty is not the right debate. It's something else that we have to build a system with ⁓ alternative options that complement each other that I fully agree with that there is a lack of sovereignty. That's what I think it's the wrong destination as a debate. It's not we are not talking about sovereignty. We are talking about having realistic

Michael Salmony 14:49

So, shall we?

Javier 15:17

alternatives and different options ⁓ in a continuous manner. In every instance, you have to make a payment. When you have different options, then the ⁓ risk of dependency lowers a lot. And that's what I think is the real issue we have to discuss. Having different alternatives at each moment, you have to decide how to make a payment.

Ralf Ohlhausen 15:45

Yeah, and if I may now bring up these, so in my view, we have all the control we need. We have all the elements that we could apply and we just have to do it. We are controlling the legal framework. that's the PSD, 1, 2, 3, 4, whatever ⁓ comes, we're controlling the legal framework. We are controlling the access.

because you need a license in order to participate. In order to get a license, you need an EU ⁓ entity. You don't have to have your headquarter in the EU, so that's true. So it's open to players all around the world, including big techs, but they do have to establish a European legal entity in order to get a license. And then we are controlling the standards.

So eIDAS, the electronic signatures, ⁓ QR code, well, you name it, ⁓ we can impose and we do European standards to be used. And we are controlling the rails because we have the clearing and settlement backend with TIPS. We have all the clearing and settlement mechanisms ⁓ doing the infrastructure of the payments.

we're controlling the rules, because that's exactly what the EPC is doing. So we're setting the rulebooks for all these payments we have, we are setting the rules. And hopefully, we will also get it wrapped around, get some European ⁓ identity wrapped around it with some, you know, trust mark recognition mark for European payments that I think we should, we should have. So we have all the control.

to avoid discrimination of non-European players. So without being protectionist, but still having the power and the control to basically do it in Europe the way we want it.

Michael Salmony 17:52

Okay, I think we're reaching the end of our time of our shortened slots. It's been quite controversial today. I must say I agree with some of the things my colleagues have said, not with all of them. I do think the sovereignty topic is highly important. I really do. I don't think it's a red herring, I'm afraid. I think it's a genuine problem. And I think it's going to get even worse now with stable coins where we have USDC and USDT pouring all over the world as maybe the new global standard. So I think the sovereignty issue is super important.

But of course, I totally agree with Javier that maybe we're taking the wrong consequences from this question and maybe CBDC isn't the answer. And I also, of course, I'm a big fan of open banking. So I'm totally with Ralf about ⁓ that we're not using that enough and very worried that the new PSD3 and PSR things are weakening rather than strengthening it, because that seems to be a thing that Europe is really ahead on and we should really build on that.

Okay, so please leave comments below this video if you have other opinions or if you want to contribute to the debate. Otherwise, I thank my co-trilogue gentlemen here and look forward to seeing you the next time.