The European Central Bank (ECB) is looking into what a retail central bank digital currency (CBDC) form of the euro might look like, executive member Yves Mersch said.
The ECB set up a task force earlier this year to look into what its potential CBDC could look like, and the group expects to publish a preliminary report in the coming weeks, said Mersch, an executive board member at the ECB. He spoke during CoinDesk's Consensus: Distributed conference Monday on central banks and their approach to the digital currency.
"A wholesale CBDC, restricted to a limited group of financial counterparties, would be largely business as usual," Mersch said. "However, a retail CBDC, accessible to all, would be a game changer, so a retail CBDC is now our main focus."
A retail CBDC could be based on a digital token circulated "in a decentralized manner," without a central ledger, Mersch said, though he stopped short of saying the words "blockchain" or "distributed ledger."
He acknowledged that the traceability of digital transactions would raise privacy concerns among a population used to paying for some things with paper notes.
"Some argue that a token-based digital currency might not guarantee complete anonymity. If that proved to be the case, it would inevitably raise social, political and legal issues," he said. "We are currently looking into the legal questions raised by the potential use of intermediaries to facilitate the circulation of a CBDC and also the processing of transactions in a CBDC."
Some of these legal questions include whether the ECB can outsource public tasks to private entities, and what sort of supervision these entities would need.
One consideration for the creation of a CBDC is whether cash use is starting to decline, Mersch said. This decline, if any, is modest at best in the euro area – in March, the latest month he had data for, banknote circulation reached a peak of nearly 19 billion euros.
"While electronic payments are already crowding out the use of cash in some countries, whose currencies seem less attractive than the euro, there is no such trend away from cash in the euro area," he said. "Some 76% of all transactions in the euro area are carried out in cash, amounting to more than half of the total value of all payments."
While the ECB is considering a digitized euro, there are a number of downsides it would also have to mitigate, including whether the use of a CBDC would crowd out bank deposits and other intermediaries.
Should this happen, it might amplify the effects of financial crises.
"If households were able to convert commercial bank deposits into a CBDC at a rate of one-to-one, they may find it far more attractive to hold a risk-free CBDC rather than bank deposits," he said. "During a systemic banking crisis, this could trigger digital bank runs of unprecedented speed and scale, magnifying the effects of such a crisis."
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