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The ECB’s Debate on CBDCs is Mainly Analytical

Categories : Cash does not require a technology infrastructure
May 14, 2020
Published in : CBDC, Central Bank Digital Currency, ECB, Euro
European Central Bank executive board member Yves Mersch said that the ECB would only introduce a Central Bank Digital Currency (CBDC) if they become firmly convinced that it is both necessary and proportionate in ensuring currency stability.
Guillaume Lepecq

According to a survey published in January by the Bank for International Settlements (BIS), 80% of central banks are engaging in some kind of work in relation to CBDC. However, only 40% have evolved from research to experiments or proofs-of-concept and less than 10% are running pilots, all of which come from emerging markets. These numbers have actually declined between 2018 and 2019, as illustrated by the charts below.

The BIS survey also highlights that the evolution of cash demand is a major motivation leading central banks to investigate CBDCs. For some, CBDCs could reduce the high reliance on cash whereas for others, declining transactional demand for cash could be offset by a CBDC which would provide access to central bank money for the general public. Just under half of the world’s central banks are investigating the public’s use of cash and a third are concerned that access to cash could decline in the medium term.

There is no trend away from cash in the euro area

This is not the case however at the ECB. Speaking at a virtual conference about the future of money, Yves Mersch has stated in a speech “While electronic payments are already crowding out the use of cash in some countries, whose currencies seem less attractive than the euro, there is no such trend away from cash in the euro area. Some 76% of all transactions in the euro area are carried out in cash, amounting to more than half of the total value of all payments. The demand for cash in the euro area currently outstrips the rate of nominal GDP growth. In crisis times, the demand for cash surges even higher. At mid-March this year, the weekly increase in the value of banknotes in circulation almost reached the historical peak of €19 billion.”

“The ECB’s debate on CBDCs is therefore mainly analytical.” adds Mersch. Whether and when it becomes more of a policy debate will largely depend on the preferences of households. He compares this to the choice of paper or polymer for banknote substrates, which the central bank would happily accommodate if people voiced a preference.

A retail CBDC, accessible to all, would be a game changer

Although there is not a concrete “business case” for a CBDC right now, that won’t stop the ECB “from seriously exploring the optimal design.” A wholesale model, restricted to a limited group of financial counterparties, would be largely business as usual. However, a retail CBDC, accessible to all, would be a game changer. “So a retail CBDC is now our main focus.” says Mersch.

He also stresses that a number of challenges remain unresolved at this point:

“These potentially highly adverse effects on the financial system would appear to outweigh the benefits envisaged by the introduction of a retail CBDC.” says Mersch.