ECB's Panetta: The present and future of money in the digital age

10 December 2021

Money and payments are also undergoing rapid change. Innovative tools are emerging. Not so long ago, cash was more or less the only way to make an immediate purchase... now we use private digital money such as online bank transfers, payment cards and applications on our smart phones or watches.

I would like to thank Federcasse for inviting me to speak at this edition of the Lectiones cooperativae. These lectures are an occasion to reflect on issues of broad significance and their implications for the application of the principles of cooperation. They offer us the opportunity to seek a deeper understanding of the changes taking place in the economy and in society.

The topic of this speech – the present and future of money in the digital age – has certain unique features. It is an age-old topic, because we have been talking about money for millennia, from the times of Ancient Greece and pre-Republican Rome. But at the same time it is a topical issue, because the digital revolution is transforming the role and the nature of money.

It is a subject for specialists: economists, lawyers, and technology experts. Yet it concerns each and every one of us. We all use money in one form or another – every day, and often several times a day. And we are all involved in the changes currently under way.

At the international level the digitalisation of money and payments is being examined by the G7 and the G20. In Europe, it is frequently discussed by Finance Ministers in the Eurogroup. It is on the agenda of the European Commission and the European Parliament. It was addressed by the heads of state or government at the Euro Summit last March. And it is of course central to the agenda of the European Central Bank (ECB).

This strong focus can be explained by the far-reaching changes that are under way. Digitalisation is changing the way we work, interact with each other and use our time. It is changing consumption habits, social relations, and our very culture. It is, in effect, changing the way we live.

Money and payments are also undergoing rapid change. Innovative tools are emerging. Not so long ago, cash was more or less the only way to make an immediate purchase. Today, however, we have grown accustomed to using forms of private digital money such as online bank transfers, payment cards and applications on our smart phones or watches. These are changes that directly affect the role of central banks.

In October the Eurosystem opened the investigation phase for the possible introduction of a digital euro: electronic money issued by the central bank.

If a digital euro were issued, it would have significant consequences. It would have not only economic and financial repercussions, for instance as regards the transmission of monetary policy, financial stability, and the operation of the international monetary system. It would also have wider relevance for global geopolitical equilibria and the fundamental rights of individuals, such as the right to privacy.

In my speech today, I will illustrate the key characteristics and implications of this new money. And I will then discuss how we can maximise its benefits and reduce its risks.

The digital euro: what it is (and isn’t)

The digital euro would be a form of sovereign money provided by the ECB in electronic format. It would be used by anyone – households, businesses, commercial outlets – to make or receive retail payments throughout the euro area. It would give citizens the same services they now obtain from paper banknotes: access to a secure payment instrument that is cost-free, easy to use and universally accepted within the euro area.

The digital euro would complement cash, not replace it. It would provide people with fuller and easier access to electronic payments, promoting financial inclusion. Unlike cash, it could be used not just for people to transfer money to each other or for purchases in commercial outlets, but also for online purchases. And as it would be a central bank liability, the digital euro would, like banknotes, be free of any risk, be it market risk, credit risk, or liquidity risk.

Crypto-assets and stablecoins[1]

The digital euro has nothing to do with crypto-assets such as Bitcoin.

As it would be issued by the central bank, the value of the digital euro would be guaranteed by the State. Crypto-assets, on the other hand, are not issued by any accountable entity: they are notional instruments with no intrinsic value, which do not generate income flows (such as coupons or dividends) or use-value for their owners. They are created using computing technology and their value cannot be ensured by any party or guarantee. Crypto-assets are exchanged by operators whose sole objective is to sell them on at a higher price. They are, in effect, a bet, a speculative high-risk contract with no supporting fundamentals. That is why their value fluctuates wildly; hence crypto-assets are not fit to perform a currency’s three functions: means of payment, store of value and unit of account.

The value of crypto-assets is growing rapidly and currently stands at over 2,500 billion dollars.[2] That is a significant figure with the potential to generate risks to financial stability that shouldn’t be underestimated. For example, it exceeds the value of the securitised sub-prime mortgages that triggered the global financial crisis of 2007-2008.

In spite of the substantial sums involved, there is no sign that crypto-assets have performed, or are performing, socially or economically useful functions. They are not generally used for retail or wholesale payments, they do not fund consumption or investment, and they play no part in combating climate change.

In fact, there is clear evidence that they do the exact opposite: crypto-assets can cause huge amounts of pollution and damage to the environment.[3] And they are widely used for criminal and terrorist activities, or to hide income from the eyes of the tax authorities.[4] Moreover, they provide legitimate investors with no protection whatsoever against IT or cyber risks.[5] On the whole, it is difficult to see a justification for the existence of crypto-assets in the financial landscape.

The digital euro also differs from stablecoins....

more at  ECB


© ECB - European Central Bank