The digitalization of finance is accelerating during the COVID-19 outbreak. Even before the pandemic, FinTechs and BigTechs had begun to change market dynamics by offering new forms of money and new means of payment. Central banks are also looking into the future of money and payments, and at the potential issuance of digital currencies.
Yves Mersch, Member of the Executive Board of the European Central Bank (ECB) and Vice-Chair of the Supervisory Board of the ECB, gave a recent speech on this subject. Mersch underlined that currently in Europe there is a lack of a concrete business case for a Central Bank Digital Currency (CBDC). Nevertheless, this should not stop the ECB from exploring the potential optimal design of a CBDC and from making preparations in case the bank decides to issue a CBCD in the future. Mersch noted that EU citizen demand would be the main driver to accelerate a CBDC development, which is not evident since 76% of retail transactions in the Eurozone area take place through cash. For this reason, the ECB’s current focus is on examining the soundness of a retail CBDC.
As Mersch indicated, designing a retail CBCD entails legal implications that have to be thoroughly vetted. From a legal standpoint, a key concern is whether a retail CBDC could and should be usable at any location and under any condition, possibly even offline as banknotes and coins (legal tender status). In the absence of a legal tender status, its legal basis along with its relationship to euro banknotes and coins would have to be clarified. He added that there are two options for the issuance of a retail CBCD: (i) base on digital tokens; or (ii) base on deposit accounts with the central bank. While the digital tokens-based CBCD would be decentralized to allow for anonymity, it would raise concerns on the processing of transactions and the supervision of the financial intermediaries circulating it. Similarly, an account-based CBCD would increase the number of current deposit accounts offered in the EU from around 10,000 to between 300 and 500 million. More concretely, opting for an account-based CBCD could potentially affect the central bank’s role in ensuring financial stability, since the central bank would be required to establish consumer-facing services and comply with AML, consumer protection and confidentiality obligations.
Mersch also addressed the financial consequences of introducing a retail CBCD. In the event that retail consumers could buy a CBDC from a central bank, there would be no incentives for them to entrust their deposits with retail banks. Moreover, if retail banks could not manage to offer more attractive services than those offered by a central bank, this could cause digital bank runs of unprecedented scale, which would be economically inefficient and legally untenable.
A large number of central banks are working on CBCD development around the world, according to a report issued by the Bank for International Settlements (BIS). However, the BIS report notes that most of these initiatives are still at early stages, since central banks appear not yet convinced that the CBCD benefits would outweigh costs.