19 April 2023

SUERF's Bofinger/Haas: The Digital Euro (CBDC) as a Monetary Anchor of the Financial System

First, as an anchor for commercial bank deposits, guaranteeing their convertibility into central bank money. Second, as an anchor to maintain the national currency as a unit of account. Third, as an anchor for maintaining the central bank’s control over the financial system.

The European Central Bank justifies the introduction of the digital euro with the role of a central bank digital currency as a monetary anchor. Three anchor roles for a CDBC can be distinguished: First, as an anchor for commercial bank deposits, guaranteeing their convertibility into central bank money. Second, as an anchor to maintain the national currency as a unit of account. Third, as an anchor for maintaining the central bank’s control over the financial system. We discuss the different anchor roles and analyse whether the introduction of a CBDC is necessary for these anchor functions. We argue that a CBDC can be justified as an anchor for bank deposits, but this would require unlimited access to a store of value, whereas the ECB envisages very limited CBDC holdings as a means of payment. Anchoring the national currency as a unit of account requires the stability of the currency. For the central bank’s control over the financial system, it is crucial that banks need central bank money as a means of payment and settlement. Thus, it is the holding of central bank money by banks, and not by non-banks, that is required as the ultimate monetary anchor for the financial system. Finally, the experience of several major central banks shows that the appropriate response to the declining use of cash in retail payments is not a CBDC, but the orchestration of competitive national retail payment systems.

1. Introduction

In trying to justify the need for a digital euro, the ECB is increasingly referring to the argument that a central bank digital currency is needed as a "monetary anchor". While this is an interesting argument, it is not entirely clear what the anchor role entails. In our view, it confuses three interrelated but distinct aspects:

• an anchor for commercial bank deposits,
• an anchor for maintaining the national (or euro area) currency as a unit account,
• an anchor for the central bank’s control over the financial system.

We will show that each of these three perspectives has different implications for the role of a monetary anchor. A clear case can be made for anchoring commercial bank deposits with the possibility of converting them into CBDCs. This "anchor" would require full convertibility, whereas the ECB seems to envisage only very limited holdings of the digital euro and which de facto implies no convertibility for the corporate sector and non-bank financial intermediaries. But as long as banks are required to hold reserves with the central bank, the banking system remains anchored to the central bank even without convertibility of bank deposits into cash or a CBDC. As far as the anchoring of the unit of account role is concerned, the main requirement is the stability of the currency, not the use of a CBDC in daily payments. For the central bank’s control over the financial system, the main requirement is the final settlement of payment balances with central bank money. While one could imagine payment platforms with settlement systems based on stocks, this is not very likely for the time being. But a CBDC used for daily payments could not avoid such developments. Finally, the discussion on the role of the monetary anchor shows that the ECB’s approach to the dynamic processes in the retail payments landscape has the wrong focus. The example of several major central banks shows that it is possible to establish competitive national retail payment systems and thus financial sovereignty without a CBDC.

In sum, the ECB’s justification of the need for a digital euro in daily payments as a monetary anchor is not convincing. All that is required for the safeguarding of the role of public money in a digital economy is the need for the banks to use and to hold reserves with the central bank...

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