The promised digital euro has started to take shape this week and signs from Frankfurt may offer some relief to nervous commercial banks worried about being left out of the latest development.
With the pandemic driving contactless transactions and accelerating the demise of metallic cash, along with private sector cryptocurrencies and “crypto stablecoins” threatening to invade the market, last year’s promise of a digital euro five years from now is it did before the European Central Bank knew exactly what it would be or how it would work.
With almost every central bank working on digital legal tender suggesting a different model or system, the design debate has varied greatly in the last 6 months: from digital currencies known as “tokens” to direct bank accounts central or something in between.
However, responses to the ECB’s public consultation, published this week, have helped narrow down the options discussed, with a preference for privacy, though not anonymity, and a role for the existing banking system.
Although it is only a survey, and the ECB has warned of the lack of representativeness of the sample among the citizens of the euro area, it may give some clues about the direction to follow.
Respondents’ strong emphasis on privacy and security appears to be matched by a preference for the digital euro to exist offline, as a token stored in smartphones or digital wallets. What’s more, they seem to want it to exist alongside physical money, not in its place, and to work alongside the existing banking system.
This responds to one of the biggest financial stability issues affecting digital currency plans, which are already being tested by the People’s Bank of China and have been labeled a “high priority project” by the US Federal Reserve.
Many fear that if a digital currency is effectively a deposit account opened directly at the central bank, then its inherent collateral will cause deposits to flee commercial banks, especially in a crisis, and undermine the retail banking system.
To counteract this, Fabio Panetta, a member of the ECB council, has proposed limiting deposits to households and to a maximum of 3,000 euros, in fact penalizing holdings above that figure and company or investor accounts, with deeply negative interest rates .
Nearly half of this week’s ECB survey agreed with such staggered remuneration or with strict limits on digital euros in circulation. But the ECB stressed that the respondents had not offered any viable solution to the problem of how to stagger the remuneration of offline tokens.
If other polls suggest that preference for an offline token that “should be integrated into existing banking and payment solutions”, as the ECB reading concludes, then it may be a less disruptive development than many initially feared.
In a document published just before the ECB survey this week, US bank Morgan Stanley (NYSE: MS ) became the latest financial firm to publish its opinion on upcoming central bank digital currencies.
His best hypothesis is that Central Bank Cryptocurrencies (CBDCs) will be aimed at households, will be accessible through financial intermediaries and will work with a centralized system regulated by the monetary authorities.
However, Morgan Stanley warned that while banks are likely to remain important as financial intermediaries, they will face tougher “competitive pressures.”
These include competition for bank deposits up to CBDC holding limits, the arrival of new entrants into a digital payments industry spurred by easy online use of CBDCs, and banks’ decreased access to customer spending data.
“Although efforts by central banks to introduce CBDCs are not intended to disrupt the banking system, they are likely to have unintended disruptive effects,” Morgan Stanley concluded.
For macroeconomic investors, the design will be critical in assessing potential currency spillovers from potentially unlimited holdings of digital euros or dollars abroad.
It will also affect the CBDCs that policymakers use to manage economies in the future: injecting cash directly into households in a crisis, for example, or taxing, applying negative interest rates, and even specifying certain expenses.
“This will be the helicopter money of the future,” said Cesar Perez Ruiz, chief investment officer at Pictet Wealth Management, adding that it fits with Pictet’s long-term theme of “big government” in the future and all that that entails.
“It’s no longer just a question of the value of money, but a question of what money is,” Ruiz said.