Fabio Panetta, a member of the board of directors of the European Central Bank, gave an overview of the central bank’s ongoing research into a retail central bank digital currency on Friday when he spoke at the conference of the European Central Bank. ‘IESE Business School Banking Initiative on Technology and Finance. Panetta said the issuance of central bank digital currencies, or CBDCs, is “likely to become a necessity,” but cautioned that “they should not become a source of financial disruption that could impede the transmission of monetary policy in the euro area”.
A key to maintaining financial stability when introducing digital currency, Panetta said, would be to give commercial banks a role in the process. This would allow banks to continue providing front-end services, with the central bank benefiting from their experience in customer onboarding and anti-money laundering.
A working paper released by the US Federal Reserve in January envisioned a similar role for banks. The paper notes the potential role of financial intermediaries in preserving consumer privacy. The European Central Bank, or ECB, has also addressed privacy issues.
Further, Panetta said, “As demand for liquidity weakens, issuing CBDCs could ensure that sovereign currency continues to play its role in supporting confidence in the currency and payments,” while promoting the competition between banks “by reducing banks’ market power and improving contracts”. terms for customers.
Research on 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’ whereby central banks’ goals of payments 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 evolution of other forms of digital assets “whose emergence alongside fiat currency over the past decade has been sudden and had a massive effect – similar to the Cambrian Explosion 20 to 25 million years ago.” Nonetheless, the absence of an adequate CBDC to balance the influence of other digital assets would create “risks to monetary sovereignty, central banks’ lender-of-last-resort functions, and financial stability,” Panetta concluded.