On Friday, Fabio Panetta, executive board member of the European Central Bank, provided a brief on the ongoing research on a retail central bank digital currency during his talk at the IESE Business School Banking Initiative Conference on Technology and Finance.
Panetta explained that the central bank digital currencies or CBDCs’ issuance would potentially become a “necessity.” However, he also gave the warning that they shouldn’t cause financial disruption leading to the damage to “the transmission of monetary policy in the euro area.”
Further, Panetta says that one essential factor in maintaining financial stability while digital currency is introduced is to assign a role to commercial banks in the whole procedure. Now, this needs to be done so that banks can continue to offer front-end services since the central bank has profited from its experience in Anti-money laundering and customer on-boarding.
Interestingly, the United States Federal Reserve issued a discussion paper in January that outlined a similar role for banks. The discussion paper talked about how financial intermediaries can have a role in the protection of customers’ privacy. Besides, the European Central Bank, or ECB, has also discussed privacy issues.
Panetta also forecasts that issuing CBDCs at a time with the decrease in demand for cash can guarantee that the sovereign money keeps establishing the trust in money and payments, at the same time promoting healthy competition among banks which can be done by cutting down the market power of banks and enhancing “contractual terms for customers.”
Panetta also outlines that the research on the rather complicated synergy CBDCs and monetary policy shows the importance of careful CBDC design. He says that the ‘CBDC trilemma’ which states that the central banks’ objectives of payment efficiency, price stability, and financial stability can be achieved together, needs to be solved.
Panetta further explains that it has become more difficult to design digital currency due to the rapid evolution of other digital assets which have emerged alongside fiat currency over a decade and have experienced an unexpected huge effect, a lot like the Cambrian explosion of 20 to 25 million years ago.
At last, Panetta forecasts that the absence of an adequate CBDC to stabilize the impact of other digital assets can be a threat to monetary sovereignty, “the lender of last resort functions of central banks and financial stability.”
Source: https://www.thecoinrepublic.com/2022/04/09/cbdcs-issuance-likely-to-become-a-necessity-says-ecb-executive-board-member/