The European Central Bank recently responded to a European parliamentarian that it has no plans to introduce a digital euro. But Miguel A. Fernández Ordóñez argues the arguments put forward by the ECB are irrelevant for some proposals of central bank issued digital currencies.
This article was previously published on the blog of the Spanish Foundation for Research on Law and Business.
Before the Summer, Jonás Fernández, a Spanish Member of the European Parliament, had send a question to the ECB about the idea put forward by some economists to issue a digital version of the euro (or central bank digital currency), thus providing current accounts for people at the national central banks.
As an argument in favor of this idea, Jonás Fernández mentioned that liquidity could be injected directly into the economy, without the need to do so through financial institutions, which currently does not ensure an effective transmission of the ECB’s monetary policy. The parliamentarian also raised a very important legal question, specifically asking whether “there is any restriction in the Statue of the ECB and the ESCB on opening these accounts in the Eurosystem.”
The ECB’s response is interesting because it recognizes the potential contribution that a digital euro system could make to the stability and digitalization of the economy. It also accepts that a digital euro would allow monetary policy to reach a wider range of economic actors more directly than is currently the case. On the other hand, the ECB points out that this type of currency can have effects on the banking system and the financing of the economy.
These observations are widely shared. More surprising are the two arguments put forward by the ECB to justify why issuing a digital euro should not be an option in the short term. The first argument is that Distributed Ledger Technologies (DLT, or blockchain) have not yet been tested and require more developments before they can be used by central banks. The second argument is that providing individual accounts for households and companies would imply that the Central Bank would enter into competition for deposits in the banking sector, which would incur “potentially substantial operational costs and risks.”
These arguments sound reasonable, but only if the design of such a digital currency system issued by the central banks were to be based on blockchain-type technologies ; and in the case where, private banks would continue to create deposits alongside the new digital money issued by the Central Bank.
But these arguments do not disqualify digital currency proposals which do not require DLT technologies for the management of deposits. Indeed, a digital euro system could perfectly use the conventional technologies that are already being used by every private banks today.
There are also variations of CBDC proposals in which there would be no competition between private deposits and central bank moneyi. In such scenarios, the ECB’s argument does not stand either.
The irrelevance of these two arguments indicates that this issue has not yet been thoroughly studied by the ECB, as was recommended in the recent report by the Bank for International Settlements (BIS). More work is required because, as the ECB says in its letter, “the actual costs and benefits would ultimately depend on the specific features of a digital version of central bank money.”
Miguel A. Fernández Ordóñez was governor of the Bank of Spain from 2006 until 2012