The ECB’s case for central bank digital currencies
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The writer is a member of the executive board of the European Central Bank
Just as the postage stamp became less relevant with the arrival of the internet and email, so too could cash lose relevance in a digital economy.
The use of cash in payments is declining as people increasingly prefer to pay digitally and shop online. In the euro area, half of consumers now prefer to pay with cashless means of payment. Online sales have doubled since 2015. If these trends continue, cash could lose its pivotal role.
This has implications for the key role of central bank money in payments. Today, it is widely used by households and businesses for consumer and person-to-person transactions in the form of cash, and by financial institutions for wholesale transactions in the form of electronic deposits.
But the role of cash is challenged by digitalisation, while the emergence of new technologies creates new possibilities for wholesale transactions. To continue playing its role as the anchor of the monetary system, central bank money will need to respond to evolving needs. This means that work on central bank digital currencies must be intensified.
Retail CBDCs are about creating the possibility for everyone to use central bank money for digital retail payments. This is the focus of the European Central Bank’s project to develop a digital euro.
Some people have argued that retail CBDCs would be redundant given the vast supply of private digital means of payments.
In my view, the opposite is true. The smooth functioning of payments, which is critical for monetary and financial stability, ultimately depends on sovereign money continuing to play its anchoring role in the digital era. So central banks must evolve with changing technologies, payment habits and financial ecosystems. Let me explain why.
We are accustomed to using different forms of money interchangeably. We are confident that “one euro is one euro” whatever form it takes, and this allows payment systems to run smoothly and commerce to flow.
But this “singleness” of money has not come about by chance. Confidence in private money — bank deposits, credit cards and e-payment solutions — rests on the ability to convert it, at par, into central bank money, which is the safest form of money available. Runs on private money start when this confidence disappears.
This is not to say that other safeguards — such as banking regulation and supervision, deposit insurance and the monitoring function of capital markets — are not also important and effective. But they need to be complemented by the convertibility anchor as a basis for maintaining a well-functioning payments system and financial stability.
Without central bank money to provide an undisputed monetary anchor, people would have to monitor the soundness of private issuers in order to assess the value of each form of private money, undermining the “singleness” of the currency. Indeed, history has repeatedly shown us that different forms of private money coexisting in the absence of sovereign money leads to crises.
The primary policy objective of a digital euro would be to pre-empt such a situation. Retail CBDCs aim to ensure that public money remains widely accessible and usable for daily transactions.
The challenge is different for wholesale CBDCs. These already exist: central banks provide digital infrastructures for the settlement of transactions between banks in central bank money. In the case of the Eurosystem, these are its Target services: Target 2 for wholesale payments, Target 2-Securities (T2S) for securities settlement and Target Instant Payment Settlement (TIPS) for instant payments.
The widespread use of central bank money, as the safest and most liquid settlement asset for wholesale transactions, helps reduce risks to the financial system. In parallel to our work on a digital euro, we thus need to continually assess the need to upgrade the services we offer for the settlement of wholesale transactions. This is why we are working on consolidating the Target2 and T2S platforms.
The attractiveness of Target services has recently been confirmed by the formal expression of interest to study further a migration to Target services by the Danish Nationalbank and the Swedish Riksbank. The former has relied on T2S for a several years and the latter has already decided to adopt TIPS.
By ensuring that central bank money remains the anchor of the payment system, we will support financial stability and trust in the currency. This is crucial to preserving the transmission of monetary policy and thus protecting the value of money.
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