08 April 2022

ECB's Panetta: More than an intellectual game: exploring the monetary policy and financial stability implications of central bank digital cu

Research about CBDCs is much more than just a game. Issuing CBDCs is likely to become a necessity to preserve access to public money in an increasingly digital economy.

As it explores the interplay between technology and finance, I have chosen to focus my remarks on retail central bank digital currencies (CBDCs) – in other words, the possibility for everyone to use public money for digital payments.^[1]

It’s hard to think of a better day to discuss the advances of research in this field. Today would have been the 118th birthday of the great economist Sir John Richard Hicks^[2], who once said that “much of economic theory is pursued for no better reason than its intellectual attraction; it is a good game.”^[3]

Sir John Hicks was in fact one of those researchers keen to understand issues that mattered beyond their intellectual attraction. His pioneering contributions, such as his IS-LM model or the “liquidity trap” concept, have been of immense value to macroeconomic policy.

In the same spirit, research about CBDCs is much more than just a game. Issuing CBDCs is likely to become a necessity to preserve access to public money in an increasingly digital economy. At the ECB, last year we launched the investigation phase of our digital euro project. And globally, 87 countries – representing over 90% of global GDP – are currently exploring a CBDC.^[4]

It is therefore crucial that central banks understand the implications of CBDCs for financial stability and monetary policy. CBDCs must do no harm. In particular, they should not become a source of financial disruption that could impair the transmission of monetary policy in the euro area. Research can allow us to draw on sound analysis, informing policy trade-offs and design choices as we prepare to potentially issue CBDCs.

Today, I would like to take stock of the advances in research on CBDCs, looking at their implications for both financial stability and monetary policy. And I will discuss areas where we can further expand the frontiers of our knowledge on this topic.

Financial stability implications

Let me start with the implications of CBDCs for financial stability.

Risks to financial intermediation

The question of whether – and to what extent – CBDCs pose risks to financial intermediation is central to this debate.

A widely held view is that CBDCs could crowd out bank deposits and payment activities. They are also seen as interfering with the way in which credit lines and deposits complement each other in modern payment systems.^[5] This would make funding more unstable and costly, dent bank profitability and, ultimately, reduce lending to the economy.

A growing body of research suggests that this view is not so clear-cut, for two reasons.

First, the risks that CBDCs pose to bank intermediation depend crucially on the choices that central banks make.

Central banks can entrust financial intermediaries with distributing CBDCs. This allows central banks to benefit from the experience of intermediaries – especially banks – in areas such as onboarding of consumers and anti-money laundering checks. And it preserves the role of financial intermediaries in providing front-end services.

Central banks can also adapt CBDC design features, which are found to be strong drivers of the potential demand for CBDCs.^[6] Safeguards, including tiered remuneration or holding limits, can be effective ways of mitigating risks.^[7]

And central banks can ease liquidity conditions, for instance by providing abundant and favourable central bank funding if required to limit strains from possible changes in the composition of bank funding. Research suggests that such changes are neutral in terms of how capital is allocated in a frictionless economy.^[8]

Considering illustrative take-up scenarios of a potential digital euro, ECB staff analysis suggests that the impact on the aggregate banking sector in normal times could be manageable overall, subject to safeguards and a high starting level of central bank reserves and liquidity buffers. However, this effect is likely to vary across banks.^[9]

Second, the issuance of CBDCs can also have positive implications for the financial system.

As the demand for cash weakens, issuing CBDCs could ensure that sovereign money continues to play its role in underpinning confidence in money and payments. By continuing to provide the reference value for all forms of private money in the economy, a CBDC would protect the value of money and monetary sovereignty.^[10]

A CBDC could also improve the allocation of capital by facilitating access to payments and reducing transaction costs, thereby helping to unlock business opportunities.^[11] Similarly, CBDCs could foster competition in banks’ funding markets by reducing banks’ market power and improving contractual terms for customers, with little effect on intermediation.^[12]

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