A European Central Bank (ECB) official recently made headlines as he highlighted the benefits of central bank digital currencies (CBDC). In a speech published by the Bank of International Settlements on May 27, Vitas Vasiliauskas, Chairman of the Board of the Bank of Lithuania and a member of the Governing Council of the ECB, shared the pros and cons of CBDC. While speaking more on CBDC, he explained that it would be a “novel type of central bank money”. And while being digital in nature, it should also be distinguished as a traditional reserve account.
Since the inception of bitcoin and other cryptocurrencies, banks and financial institutions around the world have had an unwelcoming and skeptical outlook towards the digital currencies, majorly because cryptocurrency comes as a decentralized solution to various problems persisting in the traditional financial system.
He delivered the speech at the Bank of International Settlements’ Reinventing Bretton Woods Committee conference, which was focused on the global economy. During the speech, Vasiliauskas was all praise for CBDC, saying that its something new, unlike what we currently have under the present financial architecture.
However, the digital money will be fundamentally different from private crypto assets, because it would be actual money. It would fulfill all the traditional roles of the traditional currency and like the current forms of central bank money, it would serve as a medium of exchange, a means of payment and as well as a store of value.
Defining CDBC wasn’t the aim of the speech, according to Vasiliauskas, that is actually the easy bit- defining what CBDC is not, which is not a conventional reserve account, and not a private crypto asset even. He was more focused on whether CBDCs should be retail or wholesale currencies, or maybe both.
In case of retail, the CBDC would be available for the general public while its access would be restricted to limited counterparty circle, mostly financial institutions, in case of wholesale. And in between the scenarios, Vasiliauskas said that multiple theoretical sub-models also exist.
Moreover, he went on to highlight the potential of CBDC in both retail and wholesale. According to the Bank of International Settlements (BIS), certain wholesale payment systems operated by central bank are nearing the end of their technological life expectancy thus making the current system vulnerable to errors.
Vasiliauskas believes that the reason behind wholesale CBDC could be grounded in enhancing payments and securities settlement efficiency, as well as in reducing counterparty credit and liquidity risks.
On the other hand, while referring to retails CBDC Vasiliauskas said:
Clearly, we live in an age characterized by the rise of electronic payment methods. Although these are often more convenient and efficient than paper banknotes, such digital payment solutions are based on commercial bank money.
In addition, he also mentioned the fact that amount of cash in circulation is decreasing in some countries, which according to him means that some day in the distant future every person will be required to have an account with a private entity in order to make payments, resulting in increased levels of financial exclusion. According to Vasiliauskas, retail CBDC has the potential to ensure that people continue to have access to central bank money.
The spectrum of benefits offered by CBDC reaches far beyond just payments. Vasiliauskas mentioned how some people believe that issuing interest-bearing retail CBD could improve the transmission of monetary policy. It also has the potential to strengthen the pass-through of the policy rates to deposit and lending rates.
Moreover, CBDC could also positively affect financial stability, as central bank money is generally more secure as compared to commercial bank money because the later bears liquidity risks.
However, the speech wasn’t just about the bright side of CBDC, Vasiliauskas also acknowledged the dark side of CBDC, emphasizing on the underlying risks and uncertainties related to central bank digital currency.
According to him, the robustness of the underlying technology for the issuance of CBDC is uncertain at best because the distributed ledger technology (DLT) is still in a process of maturing and people are still learning about its functionality and working. Additionally there is also the issue of adherence to the money laundering requirements. Vasiliauskas said:
Given the ease with which large amounts can be transferred electronically, how are we to apply the AML standards to the anonymous forms of CBDC?
He believes that the AML compliance would place a huge prevention burden on central banks on any level of anonymity of the currency.
Other Banks and CBDC
The European Central Bank isn’t alone in its quest for CBDC, there are several other central banks around the globe working on central bank digital currency. The Riksbank in Sweden appears to be the closest to actually issuing a CBDC, dubbed the e-Krona, which has been in the works since early 2017.
The fundamental reason behind the development of e-Krona is that the state needs to maintain an important role in the payment system even in the digital currency ecosystem, considering the trend of dramatically declining cash use in the country.
However, not all banks are as welcoming to CDBC as the Riksbank or the Bank of Lithuania, the central bank of Denmark has announced that it has no intentions whatsoever to issue CBDC in the future. Purportedly because it wouldn’t contribute to improving the existing payment solutions and it could also increase financial stability risks.
Vasiliauskas believes that research and monitoring under international organizations, such as the IMF or standard-setting bodies, could play an important part in finding an optimal future design for CBDC.