ECB’s Panetta: Need CBDCs to Preserve Monetary Sovereignty
18 February 2022
By David Barwick – NEW YORK (Econostream) – European Central Bank Executive Board member Fabio Panetta on Friday said that central bank digital currencies (CBDCs) were needed not only for central bank money to continue to serve as a standard means of payment, but also to preserve monetary sovereignty.
In a speech at the Monetary Policy Forum, Panetta said that the trend toward digitalisation meant that ‘banknotes could lose their role as a reference value in payments, undermining the integrity of the monetary system.’ Central banks thus needed to think about how the money they issue could preserve its status as a payments anchor, he said.
Although sometimes supposed that private means of payment like stablecoins could render central bank digital currencies obsolete, trust would hinge on stablecoins being convertible to central bank money or their issuers being able to deposit reserve assets at the central bank with no risk, he said.
‘But this would be tantamount to outsourcing the provision of central bank money, which would endanger monetary sovereignty’, he said. The supplanting of public money by stablecoins could negatively affect payment systems, while the associated investment of reserves could dominate the market for safe assets, he suggested, ‘with undesirable implications from a monetary policy perspective.’
Without a domestic digital currency, a foreign version could gain such traction as to subvert domestic monetary sovereignty, he said, especially – though not only - in the case of large size and stability differences between the economy issuing the CBDC and the jurisdiction whose monetary sovereignty was at stake.
‘Such risks are not imminent, but they should not be underestimated’, he said. ‘Just as the US dollar overtook the pound sterling as the leading reserve currency within only a decade of the end of the First World War, digital innovation may give rise to powerful new foreign contenders, with disruptive consequences for those markets that are not prepared to face the digital challenge.’
A similar scenario already exists with respect to crypto-assets, he argued.
A CBDC would safeguard financial and monetary stability by allowing sovereign and private money to coexist, he said, but would also mean greater confidentiality of digital payments, as the data gleaned from electronic transactions could be exploited by private companies. Such fears would be mitigated in the case of a CBDC, he said, noting that the public put a premium on privacy.
Moreover, a digital euro would enhance competition and ultimately improve financial conclusion by lowering costs, he said, citing estimates that put the cost of payment services in Europe at about 1.4% of GDP.
‘Our digital euro project comes with a commitment that all – including vulnerable population groups – will have access to safe public money in the digital era’, he said.
It was essential to avoid the twin risks of ‘being “too successful” and crowding out private payment solutions and financial intermediation, or being “not successful enough” and generating insufficient demand’, he said. ‘We take both risks seriously.’
The ECB was thus endeavouring to ensure that the digital euro would be attractive as a medium of exchange, but not as an investment, he said. A cap on holdings or tiered remuneration were potential solutions under study, he said.
Progress towards a digital euro was being made, but would take time, he made clear. ‘At the end of 2023 we could decide to start a realisation phase to develop and test the appropriate technical solutions and business arrangements necessary to provide a digital euro, which could take three years’, he said. ‘Only thereafter will we decide whether to actually issue a digital euro.’
However, he added that the timetable could prove ‘optimistic’.