The ECB is working on the issuance of a digital currency. This time it is not an indiscretion: it was Yves Mersch, a member of the ECB Board and Vice-Chairman of the Supervisory Board of the same body who spoke about it during the virtual conference Consensus 2020.
His speech has been published in full on the website of the European Central Bank. His words are clear, direct and unequivocal:
“A recent survey among 66 central banks by the Bank for International Settlements shows that more than 80% are working on central bank digital currencies (CBDCs). The European Central Bank is one of them”.
Yves Mersch’s main point is that the ECB must be ready for technological change, especially if eurozone users are asking for this kind of transformation.
But the timing is not right yet, considering the reality is that the use of cash is increasing in Europe. Around 76% of transactions are carried out in cash, and with the economic crisis, the demand for cash is on the rise. Indeed, the circulation of banknotes and coins, according to the ECB representative, reached its historical record of €19 billion in March 2020.
That is why at the moment, he says, the debate is only analytical and not political. It is about following what people want, no matter what, so much so that Mersch goes so far as to speculate:
“If, for instance, people voiced a preference tomorrow for plastic or polymer banknotes rather than the traditional paper ones, we would happily accommodate them. In the same vein, we closely follow technological developments and reflect on the type of money and payments that are best suited to the needs of an increasingly digital economy”.
Yves Mersch doesn’t seem to mind that China is very close to launching its CBDC, to the extent that he says there is no tangible “business case” at the moment, adding:
“[This] does not stop us from seriously exploring the optimal design of a CBDC so that we will be well prepared should we ever take a policy decision to issue a digital currency. To this end, we have set up a task force on a CBDC within the Eurosystem”.
The speech goes on to analyse several aspects starting from:
- Legal issues;
Opportunities and risks of a digital currency for the ECB
In reality, a digital currency already exists, so to speak. The ECB in fact, explains Mersch, normally issues digital money for wholesale credit operations. However, it is a relationship with a limited number of financial operators. A retail CBDC would be something else and would require:
“A solid legal basis, in line with the principle of conferral under EU law”.
A first key consideration to be made is the following: a retail CBDC could and should have the same legal tender status as notes and coins. Basically, explains Mersch, the status of legal tender implies that a CBDC should be usable in any place and under any conditions, possibly even offline.
The CBDC should be issued by the European Central Bank just like euros and should also be exchanged with paper money. How? Probably through digital tokens that would circulate in a decentralized way and would allow anonymity, as is the case with cash.
Yet this very “anonymity” is a matter to be verified. The ECB is considering possible solutions, including relying on external parties, but another problem arises here:
“To what extent are we permitted to outsource public law tasks to private entities? And what would be the appropriate extent of supervision over such entities?”.
The alternative to digital tokens is clearly centralized and sees the opening of deposit accounts with the Central Bank which, according to an initial estimate, would go from 10,000 to 300-500 million. The exponent of the ECB explains:
“A CBDC of this nature would enable the central bank to register transfers between users, thereby providing protection against money laundering and other illicit uses (or those considered illicit by the rulers of the day), depending on the degree of privacy granted to users”.
This option does not seem to convince the European Central Bank at the moment, which is well aware that it would assume overwhelming power over banks in general. Replacing them.
And while this could strengthen monetary sovereignty, disintermediation would be a gamble, because the classic bank as we know it today would disappear.
A hypothesis that Mersch defines:
“Economically inefficient and legally untenable”.
To avoid this, the ECB is hypothesizing different types of solutions:
- To introduce the digital currency at rates below market rates in order to discourage its use and instead favour the normal market alternatives.
- Introduce a remuneration system whereby digital currency could be used as a means of payment or a store of value.
These hypotheses need to be verified.
The digital currency serves the ECB and not the other way round
The conclusion of Yves Mersch’s speech is indicative of the usefulness that the digital currency must have:
“We do not serve technology – technology serves us. We will only introduce a digital currency if we become firmly convinced that it is both necessary and proportionate to fulfil our tasks in ensuring the stability of our currency”.
In essence, the digital currency must not undermine the stability of the euro, already threatened by the economic crisis triggered by the Coronavirus and the tension among EU member states about the possibility of using the ECB for help in this delicate social phase.
And it ends:
“CBDC design choices are not merely technical questions. They have policy and legal implications. This is why we are devoting so much attention to every detail. If and when the time comes, we want to be ready – and we will be ready”.
The European Central Bank has officially started chasing the Federal Reserve. Now the ECB is not only discussing the issue of the digital currency but is also looking at how to do so, although it does not seem likely to want to get ahead of the digital dollar.