European Central Bank wants digital currency for consumers

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Yves Mersch, a member of the European Central Bank’s executive board as well as the vice chair of the European Central Bank’s supervisory board, says the European Central Bank (ECB) has set up a task force to research and develop a central bank digital currency (CBDC) for retail use. In other words, the ECB is investigating whether or not it’s possible to create a CBDC for consumers. 

“A retail CBDC, accessible to all, would be a game-changer, so a retail CBDC is now our main focus,” said Mersch in a keynote presentation. Digitizing currency can bring several benefits to the users of the currency, as well as the countries that use the currency. Let’s take a look at a few of the advantages of a CBDC.

Pros and cons for the euro area

CBDC makes it easier to audit companies and ‘follow-the-money’ because all transactions get recorded on a digital ledger. In addition, payments are settled faster, and countries experience cost savings because they no longer have to print paper money or mint coins for their citizens. For this reason, electronic payment methods have already become popular in many countries.

“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,” said Mersch. “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.”

Many countries have already shifted toward a digitized landscape for their currencies, such as China and their use of WeChat Pay. However, the euro-area is highly cash-centric, with nearly 80% of all transactions taking place in cash. When you consider that such a large percentage of the transactions involve cash transfer, you realize that getting the consumers in the euro-area to adopt a CBDC may not be as easy as it sounds.

Old guard obstacles

On top of the problems that accompany consumer adoption, CBDCs also have the potential to create fundamental problems for banks. 

“If households were able to convert commercial bank deposits into a CBDC at a rate of one-to-one, they may find it far more attractive to hold a risk-free CBDC rather than bank deposits. During a systemic banking crisis, this could trigger digital bank runs of unprecedented speed and scale, magnifying the effects of such a crisis,” said Mersch.

Banks use their customers’ deposits to create loans and other financial products that generate revenue. However, when money is digitized, consumers might feel more comfortable keeping all of their savings in a digital wallet that they have full ownership of rather than an institution that uses consumer money to make more money for themselves.

If financial institutions were no longer receiving deposits that allow them to create financial products, their productivity would decline and it would probably result in a decline of revenue for banks. In addition, with a CBDC it becomes easier to have a run on a bank; all you would need to do is withdraw from a financial institution to your digital wallet. If consumers had worries about the future of an economy, a run on the bank is more likely to happen and could exacerbate an economic crisis.

Although a CBDC could introduce benefits to the euro area, there are still some obstacles to overcome and safeguards that need to be put in place to prevent disaster. Until the ECB task force has those answers, the Euro will be the dominant currency in the euro-area economy. But considering that the ECB task force is working towards bringing a CBDC to retail users, a digital currency might be arriving sooner than later.

To learn more about central bank digital currencies and some of the design decisions that need to be considered when creating and launching it, read nChain’s CBDC playbook.