Publication - Digital Base Money: an assessment from the ECB’s perspective
Speech by Yves Mersch, Member of the Executive Board of the ECB, at the Farewell ceremony for Pentti Hakkarainen, Deputy Governor of Suomen Pankki – Finlands Bank - Helsinki, 16 January 2017
We are living in digital times. The internet and portable online devices have radically transformed the way we use and exchange information, and the way we exchange money. Money has been digitalised in many ways and we can now, for instance, transfer bank deposits electronically and pay with e-money.
Today I will focus on one type of digital money – Central Bank Digital Currency, or Digital Base Money (DBM). This is money that is characterised by two features: (1) like banknotes in circulation, DBM is a claim on the central bank; (2) in contrast to banknotes, it is digital.
Of course, DBM already exists. Commercial banks and some other types of institution hold digital claims on central banks in the form of deposits. But there has been more recent discussion about whether central banks should provide DBM to a wider range of counterparties, allowing non-banks, including households, to hold accounts at the central bank. The People’s Bank of China, the Bank of England and Sveriges Riksbank have published on this topic or have indicated that they are conducting some work on it.
I see two main reasons why this discussion on DBM has been started.
First, electronic payments have become increasingly popular. There are already a number of electronic payment methods provided by the financial industry, such as credit, debit and pre-paid cards. But these methods are based on commercial bank money and people may prefer to hold claims on the central bank to avoid the risk that the commercial bank defaults. From this perspective, an increasing demand for DBM could emerge.
Second, some technological developments may now render the introduction of DBM much easier and potentially less expensive than ten years ago. This includes Distributed Ledger Technology, or DLT, a variant of which is used for Bitcoin.
These are good reasons to start a discussion on DBM and for research to understand better the options available for DBM and their implications for central banks in fulfilling their mandates. In some European countries, for instance in Sweden and Denmark, electronic payments have started crowding out the use of cash. This may give the discussion an additional drive. In the euro area, however, we do not see a trend away from cash. By contrast, in recent years the growth in demand for banknotes in the euro area has by far exceeded that of economic output.
For the ECB, the discussion is therefore mainly an analytical one. The ECB would in particular have to understand the impact – positive or negative – of DBM on our primary objective of price stability before considering introducing it. Moreover, any value judgement on DBM needs to be assessed against a number of high-level principles, namely (1) technological safety, (2) efficiency, (3) technological neutrality, and (4) freedom of choice for users of means of payments.
Today, I would like to outline some of the various options for designing, issuing and managing DBM, and discuss some of their potential consequences. This will not be an exhaustive list, but it can give first insights into the complexity of the issue at hand.
Account-based versus value-based Digital Base Money
Let me start with a primarily legal dimension, which is the distinction between account-based and value-based DBM. Current DBM in the form of commercial bank deposits at the central bank is account based. A transfer of DBM from one bank to another reaches finality when the funds are debited from the account of the payer and credited to the account of the payee. The central bank is directly involved, as it registers the transfer.
Cash is different: it is value based and accounts are not involved. A transfer of cash is final when the payer hands the cash over to the payee. The central bank does not register transfers of cash, only the initial issuance and the final return.
DBM held by non-banks could either be account-based – in this case, the central bank would open an account for every interested non-bank – or it would be value-based like cash. In this case, interested non-banks would need to be equipped with electronic wallets for holding and using DBM. A transfer of DBM would require that the funds be debited from the payer’s electronic wallet and credited to the payee’s device without the involvement of the central bank.
Whether DBM is account based or value based might matter for several reasons. Let me mention two. First, value-based and account-based DBM may require very different types of technology with specific safety features and costs. DLT may be fit for both, but in different ways. Second, anonymity towards the central bank can be achieved only with value-based DBM. These factors may influence the demand for DBM by non-banks and whether DBM would be used more to substitute cash or bank deposits.
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