The digital euro and the evolution of the monetary system

Introductory assertion by Fabio Panetta, Member of the Government Board of the ECB, on the Committee on Financial and Financial Affairs of the European Parliament

Brussels, 15 June 2022

I’m happy to affix you right here as we speak to debate the progress we’ve made in our digital euro challenge.

A digital euro would allow Europeans to make use of public cash for digital funds all through the euro space – identical to they will use money for bodily funds.

Bringing central financial institution cash into the digital period is a logical step as funds change into more and more digitalised. And that is important for 2 essential causes.

First, we have to protect the position of public cash because the anchor of the funds system in an effort to guarantee the sleek coexistence, the convertibility and the complementarity of the varied kinds that cash takes. A robust anchor is required to guard the singleness of cash, financial sovereignty and the integrity of the monetary system.

Second, a digital euro would contribute to our strategic autonomy and financial effectivity by providing a European technique of cost that could possibly be used for any digital cost, would meet Europe’s societal targets and could be based mostly on a European infrastructure.

We are going to design the digital euro in a manner that makes it enticing to customers, who want to use it to pay anyplace.[1] Giving authorized tender standing to the digital euro would make this potential, and will probably be determined by you, the co-legislators. It could additionally assist to attain the community results which are key to the success of cost options.[2]

We may even attempt for the best requirements of privateness[3] and purpose to contribute to monetary inclusion and foster digital innovation, together with as regards the programmability of funds.[4]

As for implementation, we’re working to minimise the time to market, prices, dangers and ecological footprint related to the digital euro.

Particularly, we’ll make it possible for the digital euro builds on the expertise of economic intermediaries in consumer-facing companies, doesn’t crowd out non-public technique of cost, and preserves monetary stability. And that is the side that I’ll concentrate on as we speak: the potential affect of a digital euro on the monetary system.

The digital euro and the evolution of the monetary system

As we discover the design of the digital euro, we’re not solely trying on the funds panorama of as we speak – we’re the truth is additionally contemplating the way it may evolve sooner or later.

Think about a world during which the central financial institution continues to supply solely money, however folks more and more desire to pay digitally and the one digital types of cash obtainable to them are non-public ones.[5]

In such a world, central financial institution cash would lose its key position in funds, and it could not be potential to make sure the complementarity and convertibility of private and non-private cash.[6] All the financial and monetary sector could be disadvantaged of its anchor – central financial institution cash – and could be uncovered to potential instability.[7]

Additionally it is conceivable that non-European digital cost options and applied sciences operated overseas may dominate our funds market, as we’re already seeing in some segments like playing cards and on-line funds. This danger could be exacerbated by the growth of technique of cost provided by huge techs, which may use their very giant buyer base to their benefit. This may elevate questions on our autonomy and privateness in funds. It may even endanger European sovereignty.[8]

Furthermore, the worldwide financial system may even see the emergence of central financial institution digital currencies (CBDCs) in giant economies. Such CBDCs would supply advantages when it comes to effectivity, scalability, liquidity and security that will assist their attractiveness internationally. And they might have the potential to facilitate cross-border funds, which can improve their position as a world cost unit.[9] In such a context, not issuing a digital euro may undermine the worldwide position of the euro and create further dangers to sovereignty.

This state of affairs shouldn’t be imminent, however it may probably materialise sooner or later if we don’t begin performing as we speak.

And if we don’t act, we may even see rising confusion about digital cash. Crypto-assets are a working example.[10] Unbacked crypto-assets, for instance, can’t carry out the capabilities of cash. They’re neither secure nor scalable. Transactions are gradual and expensive. And, in some kinds, they pose a hazard to the setting and to different societal targets. Stablecoins, in the meantime, are susceptible to runs, as we’ve not too long ago seen with algorithmic stablecoins. On this context, it’s vital that any remaining regulatory gaps within the crypto-asset ecosystem are closed. I rely on the work of this Parliament to make sure that an bold regulatory framework emerges from the present negotiations on the EU Regulation on Markets in Crypto-Property (MiCA)[11] and on the present legislative proposals on anti-money laundering and countering the financing of terrorism, particularly in relation to data accompanying transfers of funds and sure crypto-assets (FCTR).[12]

To keep away from this confusion about what digital cash is and what it isn’t, we’d like the central financial institution to offer one in every of its personal, responding to the demand for digitalisation and offering an anchor of stability on this planet of digital finance.

Defending the steadiness of the monetary system

For the digital euro to play this position, we have to rigorously consider its potential affect on financial coverage, monetary stability and the supply of companies by monetary intermediaries.[13]

A digital euro would after all be issued by the central financial institution. And in contrast to probably dominant non-public actors in tomorrow’s digital funds market – equivalent to huge techs – the central financial institution would pay shut consideration to monetary stability concerns and to preserving a various and vibrant ecosystem.

This doesn’t indicate that the established order have to be maintained. It signifies that any potential dangers rising from the introduction of a digital euro ought to be contained in each regular instances and instances of economic stress. We’ve been discussing these elements intimately over the previous few months.

We’re trying very carefully on the dangers to financial coverage transmission and monetary stability that could possibly be related to the conversion of enormous components of euro space financial institution deposits into digital euro.

Deposits characterize the primary supply of funding for euro space banks as we speak.[14] If not effectively designed, a digital euro may result in the substitution of an extreme quantity of those deposits. Banks can reply to those outflows, managing the trade-off between funding value and liquidity danger.[15] The attractiveness of business financial institution deposits may even affect the diploma of substitution.

However any undesirable penalties that will outcome from the issuance of digital euro for financial coverage, monetary stability and the allocation of credit score to the true financial system ought to be minimised prematurely by design.

And it’s certainly potential to design a digital euro with efficient instruments to stop it from getting used as a type of funding fairly than solely as a method of cost.

One such software entails quantitative limits on particular person holdings.[16] One other includes discouraging its use as a type of funding by making use of disincentivising remuneration above a sure threshold, with bigger holdings topic to much less enticing charges.[17]

We intend to embed each forms of software – limits and tiered remuneration – within the design of a digital euro. Nearer to the potential introduction of a digital euro, we’ll resolve the right way to mix and calibrate them to protect monetary stability and our financial coverage stance and transmission.[18] These selections might want to consider the financial and monetary setting prevailing at that cut-off date.

Our preliminary analyses point out that preserving complete digital euro holdings between one trillion and one and a half trillion euro would keep away from damaging results for the monetary system and financial coverage. This quantity could be comparable with the present holdings of banknotes in circulation. Because the inhabitants of the euro space is presently round 340 million, this is able to enable for holdings of round 3,000 to 4,000 digital euro per capita.

Two “dynamic” components have to be taken under consideration when drawing up the preliminary parameters for limiting or disincentivising holdings of digital euro for funding functions. First, the adoption of the brand new digital foreign money by residents can be gradual; it could possible take a number of years earlier than a majority maintain digital euro. Second, it could be sensible to err on the facet of warning when calibrating these instruments after which alter based mostly on expertise and the take-up of the digital euro over time.

On the similar time, when designing the instruments, we’ll purpose for simplicity, when it comes to each technical implementation and person expertise.[19] We need to present folks with a product that’s straightforward to know and simple to make use of.

Contributing to an environment friendly European financial and cost system

Not solely would making certain the large accessibility and usefulness of public cash for digital retail funds all through the euro space assist preserve the integrity and stability of our monetary system. It could additionally contribute to an environment friendly financial and cost system in Europe.

A digital euro would play a job in strengthening the strategic autonomy and resilience of the euro retail funds market. This may additionally enable us to reply to potential disruptions to the circulation of euro funds brought on by the materialisation of geopolitical dangers.

The issuance of a digital euro would assist European sovereignty and stability in two methods: first, by contributing to the event of European-governed cost companies; and second, by selling a resilient ecosystem for euro retail funds.

For the digital euro to attain this goal, non-public and public events have to work collectively in the direction of a really pan-European digital cost answer. Suppose again to the introduction of euro money: the changeover was a standard endeavour encompassing private and non-private gamers. We should always purpose to duplicate this within the digital age.

Certainly, monetary intermediaries would play a key position in distributing the digital euro. Their expertise is crucial for us, particularly in areas just like the onboarding of shoppers, anti-money laundering checks and consumer-facing companies.[20]

A digital euro ought to improve fairly than constrain companies and enterprise choices in order that service suppliers can enrich their portfolio and develop new services and products round a digital euro to the advantage of their prospects. On this gentle, we’re stepping up our engagement with banks and different market stakeholders, together with shopper representatives and retailers. We’re listening rigorously to their views.[21]


Let me conclude.

We’re designing a digital euro that will make central financial institution cash usable for digital funds, giving Europeans a digital technique of cost that they will use all through the euro space for his or her on a regular basis funds and supporting Europe’s societal targets.

Having digital cash issued by the central financial institution and obtainable to everybody would supply an anchor of stability for the funds market, preserving the coexistence of private and non-private cash that has served us effectively up to now.

By distributing digital euro, intermediaries will play a key position.

We’re working to deal with at an early stage any potential undesirable penalties that will outcome from the issuance of a digital euro for financial coverage, monetary stability and the allocation of credit score to the true financial system.

Your position as co-legislators can be key to making sure that the required regulatory framework is in place for each private and non-private types of cash within the digital age. Personally, I’ll proceed to report back to you often as we progress to the following steps in our investigation part.

I now sit up for our dialogue.