As societies become increasingly digital, central banks are exploring the benefits of introducing central bank digital currencies (CBDCs) to align with the needs of consumers and keep the monetary system fit for purpose in the digital age.
The case for a CBDC is especially strong for a monetary union, especially in the context of a fragmented and externally-dependent payments system and “it is imperative for the ECB to introduce a digital euro”, said Philip Lane, member of the Executive Board of the European Central Bank (ECB).
“The digital euro is not just about making sure our monetary system adapts to the digital age. It is about ensuring that Europe controls its monetary and financial destiny, against a backdrop of increasing geopolitical fragmentation,” he said.
Central bank money serves as the monetary anchor: the central bank has full sovereignty over monetary policy; all forms of commercial bank money are convertible at par with central bank money; and payments can be made with both inside and outside money.
“We are now witnessing a profound technological revolution that is reshaping economies worldwide. Naturally, as has always been the case, money will adapt to these shifts,” Lane said, referring to three trends in particular:
First, the increasing digitalization of our economy is changing payment methods and behaviors. For instance, e-commerce now accounts for around one third of non-recurring payments in the euro area. Similarly, e-payment solutions (e-payment wallets and mobile apps) are gaining traction, growing at double-digit rates. These developments highlight the diminishing role of physical banknotes as a means of payment in an increasingly digital world.
Second, entirely new forms of financial assets are emerging in in the wake of this digital transformation. Decentralized finance applications and crypto-assets such as bitcoin aim to bypass traditional financial intermediation. Of particular relevance as a medium of exchange are stablecoins. The proponents of stablecoins seek to combine the advantages of distributed ledger technologies with a stable conversion rate into traditional currencies. By contrast, crypto-assets such as bitcoin are not well suited to performing the medium of exchange function due to high price volatility and an incapacity to process high volumes of transactions at speed.
Third, digital ecosystems – platforms such as Alibaba and Alipay that integrate proprietary forms of money with other services – are creating closed environments that encourage consumers to remain within specific systems.