In a recent European Central Bank (ECB) working paper, central bank digital currencies (CBDCs) were discussed as being a potential “holy grail” for cross-border payments. In it, the authors highlighted the distinct advantages they perceived the technology held over bitcoin and stablecoins as technologies for driving cross-border payments that are “immediate, cheap, universal, and settled in a secure settlement medium.”
See more: ECB: CBDC Could Be ‘Holy Grail’ for Cross-Border Payments
Now, the fact that an ECB paper argues that CBDCs are a superior payment solution compared to bitcoin and stablecoins will come as no surprise to anyone familiar with the central bank’s position on the three rival technologies.
While its peers around the world have been more cautious in making firm commitments to CBDCs, the ECB has publicly voiced its plans for a digital euro, with its Eurosystem ally the Banque de France even stating that it could launch a “wholesale CBDC” as early as next year.
More on this: Banque de France Enters Second Phase of Wholesale CBDC Project
The ECB’s commitment to the digital euro seems to be a direct response to the perceived threats of the alternative blockchain technologies discussed in the aforementioned working paper. One of those threats to the monetary sovereignty of the ECB itself is the risk of disintermediating banks.
On the first issue, a blog post penned by ECB President Christine Lagarde in July summarized the central bank’s position, depicting the challenge as relating to the balance between “public money” and “private money”.
Read on: ECB’s Lagarde Says Embrace Digital Euro, Ditch Cryptocurrencies
With the rise of digital payment solutions, including both bitcoin-style and stablecoin-type cryptocurrencies, Lagarde argued that the role of central bank-issued public money as “an anchor for the whole payment system” is under threat.
She added: “If cash is used less and less, public money could ultimately lose its role as the monetary anchor in Europe.”
For the European Union, the challenges posed by stablecoins are especially poignant considering that the world’s most popular stablecoins are all issued by private companies based outside of the bloc’s borders: Tether and Circle in the U.S. and Binance in the Cayman Islands.
“As most of these companies are headquartered outside the European Union,” Lagarde wrote, “it could exacerbate the risk of our European payments market being dominated by non-European solutions and technologies.”
By issuing its own digital currency, the ECB hopes to catch up with the advances made in the world of private money, retain its sovereignty and reduce the influence of foreign technology companies within the EU.
Related: Like Its Predecessor, the Digital Euro Will Require Security, Mobility
Disintermediation
One of the most discussed challenges of issuing a CBDC is the risk of bank disintermediation through deposit substitution, which has been the topic of a number of ECB studies and papers in recent years.
In general terms, disintermediation refers to the removal of intermediaries from a supply chain, i.e. cutting out the role of banks in the everyday economics of commerce.
The argument goes that if private individuals and firms exchange their bank deposits for retail digital currencies, this may cause bank runs, depriving commercial banks of their primary funding mechanisms with negative repercussions on economic activity.
Read more: Bankers Urge EU to Proceed With Caution on Digital Euro
As another ECB white paper argues, disintermediation is not an unavoidable consequence of digital currencies. If rolled out properly, the paper makes the case that a digital euro could mitigate the risk of bank runs because the ECB would maintain control over the rate at which cash is converted to the new CBDC.
The paper even suggests that “if the supply of CBDC is constrained, a CBDC may in fact decrease the scale and speed of runs.”
Learn more: Bankers Urge EU to Proceed With Caution on Digital Euro
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