.svg)
The European Central Bank (ECB) has said that only a digital euro can provide the trust and reliability of central bank money to support payments in the digital age, while at the same time dismissing crypto-assets as “inefficient”.
In a new blog post published last week, ECB executives Christine Lagarde and Fabio Panetta spoke of their support for a digital euro and what they see as the key objectives of a pan-European central bank digital currency (CBDC).
Noting that the payments industry is undergoing a “disruptive transformation”, Lagarde and Panetta said they would see a digital euro as a new form of “trusted central bank money” that could complement cash and other payment methods.
“The way we pay is becoming increasingly digital,” they said. “To ensure financial stability in this digital age, it is crucial that we all still have easy access to central bank money, which is the foundation of our currency. The digital euro can achieve that.”
According to Lagarde and Panetta, Europe has had in place for many decades a hybrid model that combines public and private money, but this model is due to be uprooted as digital technology evolves.
Central banks provide the monetary basis of public money in the form of cash, while the private sector has offered its own payment solutions backed by commercial bank money and deposits, or private money.
“The stability of this hybrid model rests on private money being backed by public money,” said the ECB.
“Money offered by private intermediaries can be converted to public money on a one-to-one basis at any time. In this way, public money serves as an anchor for the whole payment system.”
But in an increasingly digitised payments landscape, the ECB believes that public money could lose its role as the monetary anchor, both in Europe and in other jurisdictions.
Risks of going digital
Although Lagarde and Panetta concede that digital payments present “a wealth of opportunities” for financial innovation and inclusion, they also note that going digital comes with new types of risk.
The first of these risks is that new types of private money will be issued that cannot always be converted into central bank money.
Not only could this lead to confusion among consumers as to what really qualifies as money, but over time, it could lead to a loss of trust in the euro itself.
The ECB is particularly concerned about the growth of crypto-assets that “cannot guarantee” one-to-one convertibility with central bank money.
“They are not an efficient means of payment, especially if their value is not backed by any asset,” they said. “And, in the case of stablecoins, they are vulnerable to runs.”
As noted by other central banks, an increasingly digital landscape presents risks of currency substitution.
This could take place if all forms of digital money were to have equal access to European consumers and, if left unchecked, could also threaten trust in the euro.
“Globally, the international role of the euro could be undermined, especially if other large economies introduce central bank digital currencies that can be used across borders,” said Lagarde and Panetta.
Finally, the ECB is concerned that digital solutions from the private sector tend to be dominated by a handful of multinationals that could threaten Europe’s monetary and payments sovereignty.
The ECB added that such solutions often benefit from network effects, whereby they gain in value the more people that use them.
“This dominance could be magnified by the ability of bigtech companies to use their large existing customer bases to expand quickly, increasing the risk of market-abusive behaviour,” said Lagarde and Panetta.
“As most of these companies are headquartered outside the European Union, it could exacerbate the risk of our European payments market being dominated by non-European solutions and technologies.
“All this means that, if we are to preserve a stable and reliable payment system in Europe, we need to preserve the role of central bank money in the digital age.”
The one true coin
Lagarde and Panetta conclude by saying that, if it is to achieve everyday usage, a digital euro must “add value” compared with existing solutions.
They cite research showing that users prioritise wide acceptance, ease of use, low costs, high speed, security and consumer protection, while merchants prioritise ease of use, low costs and interoperability with existing payment systems.
The ECB also makes clear that privacy is high on its agenda in its design of a digital euro, as highlighted by VIXIO last week.
“The protection of privacy must be of the highest standard,” they said. “People should be able to choose how much information they want to disclose — so long as they comply with prevailing laws.”
By allowing central bank money to be used directly and in digital form, the ECB said a digital euro will complement cash and other forms of payments.
They also said it would expand the use of digital central bank money beyond its current remit, so that it can be used for both interbank transfers and everyday payments alike.
This would mean that citizens can continue to trust in the monetary anchor behind their digital payments.
“A digital euro, if carefully designed and introduced, could play a decisive and beneficial role in this endeavour, serving as a public good for the transition of our society and economy into the digital age,” said the ECB.
