Most of the central banks in western countries have formally adopted a neutral position when it comes to the decision of whether to issue a retail Central Bank Digital Currency (CBDC). The Federal Reserve, the Bank of England and the European Central Bank (ECB), just to name a few, are conducting research and developing the technology to design a retail CBDC, but the official stance is that they just want to be ready if policymakers decide to go ahead with it.
But central banks are starting to see more benefits in CBDCs than risks, according to some public appearances. This is the case, for instance, for the Fed’s Vice Chair Lael Brainard, who on May 26 tested before the House of Representatives in what could be seen as a speech advocating for a US CBDC. She didn’t go as far as suggesting that the US needs a CBDC, but she highlighted its benefits and proposed policy solutions to tackle some of its risks. However, the US has taken only timid steps, and the debate is far from being settled. The Federal Reserve published a white paper on this issue in January without adopting any position.
The Bank for International Settlements (BIS), the central banks’ bank, has been exploring the use of CBDCs at wholesale level for some years — and it is also experimenting with retail CBDCs with some central banks around the world. The BIS has been bullish with this technology, but the final endorsement for CBDCs came yesterday, June 21, with the release of its 2022 Annual Economic Report. In a nutshell, the BIS said that anything crypto can do, CBDCs can do better. Arguing that cryptocurrencies have fundamental flaws that make them unsuitable as the basis of a monetary system, the BIS said that while tokenization and programmability are genuine advances, private, decentralized blockchains are not needed to reap their benefits. These “can instead be built on top of central bank digital currencies (CBDCs), fast payment systems and associated data architectures,” the BIS concluded.
But it is the ECB that seems to be leaving behind any doubts about a retail CBDC. Fabio Panetta, board member of the ECB and the person in charge of designing a digital euro, has publicly praised the benefits of CBDC at wholesale and retail levels. But for Europe, a retail CBDC is more than another option for public money or an alternative to private stablecoins. It is worth mentioning that the crypto regulation proposed in Europe (MiCA) was initially designed to counteract any potential harmful effects of Libra, the stablecoin created by Facebook.
In Europe, a retail CBDC would offer a new payment rail that could benefit not only the public sector, but also European financial institutions and payment providers. The European Union has been working for years on a new retail payment strategy that would allow the region to diminish or eliminate its reliance on non-European card networks for card payments and to mitigate the risk of Big Tech firms entering the payment sector.
On the one hand, a retail CBDC in Europe would create a strong competitor for any private stablecoin. This would appease regulators as the risk of financial instability would be greatly reduced. On the other hand, EU firms could build on top of the CBDC “rails” another pan-European private retail payment solution, enabling instant payments across Europe, a sought-after strategy by EU regulators and policymakers.
In Europe, the promise of a digital currency that could end the fragmentation of the payment system across the region is very appealing, and one that regulators and policymakers may not be willing to let go.