An article published by the European Central Bank (ECB) examines various conditions for a successful implementation of central bank digital currencies (CBDCs) such as the Eurozone digital euro. The authors also highlight the various risks that such projects entail, such as the danger of crowding out the private sector.
ECB: digital euro should be widely used for payments, not for investment
In order to create success CBDC, a monetary authority must establish digital currency as a widespread means of payment and exchange that also has a function of sufficient store of value, according to the document released by the European Central Bank. At the same time, central banks must ensure that currencies such as the digital euro do not become a major investment vehicle, crowd out private payment solutions, or undermine the intermediation role of the banking industry. .
The document, which was released this week, is written by three senior ECB officials – Fabio Panetta, Ulrich Bindseil and Ignacio Terol. They list the key success factors of CBDCs and offer their expert advice on how to avoid the risks associated with the digital versions of fiat currencies that dozens of countries around the world, including major economies, are exploring or developing. currently.
The document identifies three conditions for the successful implementation of a CBDC. The first is âmerchant acceptanceâ which should be broad, meaning that users should be able to pay digitally anywhere. Unlike paper money, digital currency is likely to incur fees for each transaction and require dedicated devices to process payments. There are other differences as well, although both forms of currency are legal tender. The ECB specifies:
Cash is not practical in e-commerce, while making the CBDC legal tender may require exceptions for merchants who do not have the necessary device to accept non-cash payments. .
The second success factor has been defined as âefficient distributionâ. ECB officials cite a Eurosystem report, according to which a digital euro should be distributed through supervised intermediaries such as banks and regulated payment providers. To encourage the distribution of the central bank’s digital currency, incentives can be paid to supervised intermediaries. The document divides intermediary services into two categories: integration and financing services – which would include the operations necessary to open, manage and close a CBDC account – and payment services.
âConsumer demandâ is the third condition for success, which refers to the ability to use the CBDC to âpay anywhere, pay securely, pay privately,â the newspaper said. ECB Executive Board Member Fabio Panetta and colleagues believe eurozone residents may be motivated by the possibility of using the digital euro in peer-to-peer (P2P) payments beyond reach existing private solutions. Privacy may be another motivator, they say, pointing out that central banks could use privacy-enhancing techniques while complying with anti-money laundering regulations. Despite protests against the digital euro, in particular in this regard, the three experts insist:
As public and independent institutions, central banks have no interest in monetizing user payment data. They would only process such data to the extent necessary for the performance of their duties and in full compliance with public interest objectives and the law.
An article proposes measures to prevent the risks of CBDC
The ECB paper also discusses some of the risks associated with central bank digital currencies, such as excessive holdings of CBDCs. It suggests a number of measures to prevent a permanent or temporary excessive flow of funds into a central bank digital currency, including the introduction of limited convertibility that could end the potential outflow of bank deposits to a CBDC. Another obstacle could be setting per capita limits with a cap on how much CBDC each individual would be allowed to hold.
The paper pays particular attention to concerns that issuing a CBDC could trigger a process of bank disintermediation and crowd out payment solutions currently provided by the private sector. To avoid this negative effect, it is crucial to find an adequate functional perimeter. It should neither be too broad, crowding out private sector solutions, nor too narrow, limiting the use of the central bank’s digital currency. This could be a challenge for the financial sector, warn ECB officials.
The authors of the article conclude that if CBDCs have clear merits and central banks need to keep up with trends in payments and technology in order to continue fulfilling their mission of serving both citizens and businesses, they need to still answer many questions regarding the design of a digital currency like the euro. In addition to the functional scope, an appropriate business model and controls are needed to meet demands and ensure robust use of the CBDC, they point out.
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