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Digital euro "a necessity" - ECB director comments on the state of research

 


Yesterday, as part of the IESE Business School Banking Initiative Conference on Technology and Finance, Fabio Panetta, Director of the European Central Bank (ECB), gave an overview of the ECB's current state of research regarding a public central bank digital currency (CBDC).


To that end, Panetta stated that the issuance of central bank digital currencies "is likely to become a necessity" in the future, but warned that they "must not become a source of financial disruption that impedes the flow of money in the European Economic Area".


According to Pancetta, an important measure to be able to maintain financial stability after the introduction of a digital euro is the involvement of private banks. This would allow them to continue offering customer-facing banking services, while at the same time the central bank would benefit from banks continuing to contribute their expertise in customer service and anti-money laundering (AML). Possibly a crucial synergy, as it is often feared that the introduction of CBDCs will make private banks redundant as middlemen.


A research paper by the US Federal Reserve from January forecasts a similar role for the banking sector in the future. It states that banks could continue to play an important role in ensuring customer privacy. For its part, the ECB has repeatedly emphasized the importance of data protection .


Panetta went on to explain in his speech that “when demand for cash decreases, issuing CBDCs could ensure central banks' monetary sovereignty, thus maintaining confidence in the money and payments system”. At the same time, this could stimulate competition between banks and improve the negotiating position for customers by "reducing" the market power of the banking system.


The research results regarding the possible interactions between central bank digital currencies and monetary policy show how important a well thought-out conception of a digital euro is. "We have to resolve the 'CBDC trilemma', according to which the three goals of the central bank, payment efficiency, financial stability and price stability, are in conflict," said the ECB Director in this context.


The conception of a digital currency is made even more difficult for central banks by the fact that cryptocurrencies in particular are rapidly gaining market share. Their "rise in tandem with fiat money over the past decade has been sudden and had a massive impact, almost comparable to the Cambrian species explosion of 20-25 million years ago." Nonetheless, Panetta concludes by warning that the lack of an adequate CBDC to balance other digital currencies “poses risks to currency sovereignty, financial stability and other central bank functions.”

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