The European Central Bank is dragging its feet with its five-year timeline for its decision on the digital euro, according to Paul Tucker, former deputy governor of the Bank of England. The ECB launched a two-year investigation phase in July 2021. Once completed, it will decide on whether or not to develop a digital euro, targeting deployment around 2026.
Tucker said in an OMFIF keynote speech on 18 November: ‘These big questions don’t take five years. They take the right people having a handful of meetings over a few months, not five years.’
Nevertheless, he praised the ECB’s decision to investigate the possibility of introducing a digital euro, saying that there ‘must be no technical or policy obstacles to introducing a central bank digital currency if that is the prudent thing to do’.
Although Tucker believes these decisions can be made quickly, he did not diminish the scale or importance of the task facing policy-makers. The stakes, he pointed out, are particularly high for the US, since its geopolitical hegemony depends, in part, upon the dollar’s continued dominance. Losing that could, Tucker believes, compromise the west’s US-centric defence strategy. And with China far ahead with its own retail CBDC trials, the rest of the world has a great deal of catching up to do.
Tucker laid out a key question on the architecture of monetary systems, which will require a political decision beyond the competence of independent central banks. At present, credit provision is a function of the private sector, but Tucker warned that if a retail CBDC is introduced where individuals have accounts at the central bank, then the central bank will have difficult decisions to make regarding financial stability and the state’s role in credit provision.
However, rather than giving individuals accounts with central banks, most monetary authorities are considering a two-tiered system where they supply digital currency to commercial banks or other private sector monetary providers who then distribute it to individuals and businesses.
In the event of crises, consumers may lose faith in private money providers like banks, preferring to keep their money with the central bank, undermining the stability of banks. Tucker also pointed out that overdraft or other credit facilities at the central bank would give it a new power in directing the economy. While there may be a democratic will to give the central bank that level of control, Tucker warned that we should not sleepwalk into that situation as a consequence of introducing CBDC.
Although Tucker admitted that keeping credit creation as the preserve of the private sector means accepting a degree of financial instability, he cautioned that the alternative is a step towards a state-led economy. ‘China is in something of a win-win situation,’ he said. ‘Either they proceed on their own ahead of the dollar bloc and euro bloc in digital currencies, which may give them an advantage, or the western world develops digital currencies but become more like a state-led economy.’
He was careful to avoid either defending or undermining the status quo in which banks are the main providers of private money, saying that he was open to seeing other business models for private money creation — such as stablecoins and narrow banks — develop, even if this meant marginalising banks from their present role.
Tucker deplored the idea that we could move to an entirely digital payments system. He pointed out that a fully digital payments system not only risks disenfranchising those who wish to rely on cash, it also creates a tremendous vulnerability to large-scale cyberattack, particularly in the event of war between global superpowers.
The ECB shares Tucker’s belief in the importance of maintaining physical cash. Fabio Panetta, a member of the ECB’s executive board, highlighted this during a speech to the European parliament’s committee on economic and monetary affairs on November 18.
Tucker also discussed the best structures for central banks’ oversight of financial stability and the way in which incentives like term length are shaping the response to inflation. To hear his full discussion with John Orchard, OMFIF’s chief executive officer, as well as the rest of the panels at the European payments and digital assets conference, click here.
Lewis McLellan is Editor of OMFIF’s Digital Monetary Institute. Lewis can be reached at Lewis.McLellan@omfif.org