ECB Executive Board member gives update on Euro-CBDC digital research

European Central Bank Board Member Fabio Panetta gave an overview of the central bank’s current research on a retail central bank digital currency when speaking at the IESE Business School Banking Initiative Conference on Technology and Finance on Friday. Panetta said the issuance of central bank digital currencies, or CBDCs, “is likely to become a necessity” but warned “that they should not become a source of financial disruption that could affect the transmission of monetary policy in the euro area.”

A key to maintaining financial stability during digital currency adoption, Panetta said, would be to give commercial banks a role in the process. This would allow banks to continue offering front-end services as the central bank benefits from its experience in customer retention and anti-money laundering.

A discussion paper issued by the US Federal Reserve in January envisaged a similar role for banks. The paper pointed to the potential role of financial intermediaries in protecting consumer privacy. The European Central Bank (ECB) has also addressed data protection issues.

Additionally, Panetta said, “As demand for cash wanes, issuance of CBDCs could ensure that government money continues to play its role in boosting confidence in money and payments” while encouraging competition between banks “by increasing market power of banks will be reduced and contractual terms will be improved Conditions for customers.”

Research into the complex potential interactions between CBDCs and monetary policy illustrates the importance of careful CBDC design, Panetta noted. “We need to solve the ‘CBDC trilemma’, according to which central banks’ goals of payment efficiency, financial stability and price stability cannot all be achieved together,” he said.

The task of designing a digital currency is complicated by the rapid development of other forms of digital assets, “whose emergence alongside fiat money over the last decade has been sudden and had massive impacts – similar to the Cambrian explosion 20-25 million years ago.” .” Nonetheless, the lack of an adequate CBDC to offset the impact of other digital assets would create “risks to monetary sovereignty, central bank lender of last resort functions and financial stability,” concluded Panetta.