Ex-Bank of Greece’s Mourmouras: Covid to Hasten Advent of Digital Currency

16 December 2020

By David Barwick – FRANKFURT (Econostream) – The pandemic will accelerate the introduction of digital currency, and developments in this regard elsewhere in the world make it imperative that Europe not lag behind, former Eurosystem official John Mourmouras told Econostream on Friday.

Mourmouras served from 2015 until a few weeks ago as Senior Deputy Governor of the Bank of Greece, where he chaired the Financial Asset Management and Risk Management Committees. He was Deputy Finance Minister under Greek Prime Minister Lucas Papademos from 2011 to 2012 and now heads Interbanking Systems SA, a subsidiary of the central bank that facilitates domestic and cross-border electronic interbank payments.

The pandemic has had a major impact on retail payments for various reasons, he noted. Despite a lack of supporting scientific evidence, public concerns about viral transmission from cash have led consumers in many countries to step up digital payments. At the same time, precautionary holdings of cash have risen. Also, store closures to contain the virus have led to a surge in ecommerce, while cross-border transactions have collapsed.

From the perspective of cryptocurrencies, the pandemic thus has somewhat of a silver lining, he said. ‘This will only help bring forward the introduction of digital currencies, especially given initiatives from the private sector like Facebook’s Diem and JP Morgan Chase’s JPM Coin’, he said. ‘Clearly the pandemic will bring forward pre-set dates.’

Diem, the name of which was changed from Libra earlier this month, is a permissioned blockchain-based payment system that Facebook is planning, while American banking giant JP Morgan Chase is proposing to introduce a dollar-backed cryptocurrency for use in institution-to-institution payments.

In Europe, this could mean an earlier widespread adoption of TARGET Instant Payment Settlement (TIPS), he said. This Eurosystem service allows both private citizens and companies to make payments to each other instantaneously at any hour of any day – ‘24/7 settlement’ in euros – without an account, eliminating credit risk.

‘All these things we are going to have earlier rather than later’, said Mourmouras.

Given that the Eurosystem is statutorily responsible for promoting the smooth operation of the payments system, and that it established the TARGET2 system for real-time gross settlement more than a decade ago, ‘it may be time for a re-evaluation of its role in wholesale payments and settlement fields, including any relevant macroeconomic dimension’, Mourmouras suggested.

‘As long as the Eurosystem continues to purchase assets through asset purchase programs, the Bundesbank’s TARGET2 balance will remain high’, he said. ‘It will only shrink when the liquidity created by nonstandard monetary policy measures somehow subsides. Until then, the surplus on the Bundesbank’s balance sheet and the deficits on peripheral central bank balance sheets will persist. There’s nothing you can do about it, because it’s the nature of monetary policy and the TARGET2 settlement system.’

Turning to prospects for central bank digital currency (CBDC) in Europe, Mourmouras said that ‘although at present there is little indication of meaningful retail demand for CBDC, this may well turn around in the not-so-distant future.’

Another financial crisis, for example, would lead to increased substitution of a digital euro for cash and, in an environment of low interest rates, potentially for bank deposits as well, he said.

Mourmouras noted China’s high interest in developing their own CBDC. Earlier this year, China launched internal tests of the digital currency – the eRMB - in four major cities with an eye toward enhancing its functionality. Their motives should be clear, he said.

‘They have in mind ultimately to get a bigger share of the global reserve basket for the renminbi’, he said. ‘We will potentially wind up with a sort of global currency war, not in the traditional sense of competitive devaluations, but in the form of introducing digital sovereign currency to get a bigger share of global trade and payments and of foreign exchange reserves.’

In terms of CBDC for wholesale use, this is a good reason for Europe to introduce one sooner rather than later, he said. Early introduction of CBDC would also enhance competition in the market for payment services, he said. In addition, he said, ‘this is a first-class opportunity to modernize all major market infrastructures.’

Privacy concerns could be seen as ‘the Achilles heel of digital currency’ when trying to go from wholesale to retail, Mourmouras conceded. ‘That’s the main disadvantage. The individual has to balance competing considerations, but if there’s a crisis and you want to take money out of your bank, is it not safer to be with your central bank?’

‘I would like to see a clear role for wholesale digital euro first, and then move gradually towards a retail version’, he said. As part of the process, he said, ‘private payment service providers and possibly the Eurosystem should adopt technologies that guarantee safe and secure storage of users’ personal data.’