ECB considers issuing digital currency, says time is ripe

In a speech on Monday, European Central Bank (ECB) Executive Board member Yves Mersch talked about how to conceive, issue and manage central bank digital currencies, which are complementary to cash and have the characteristics of anonymity similar to cash.

His concept of central bank digital currency or digital base money (DBM) is the equivalent of physical currency. Mersch said that DBM already exists in the form of deposit reserves ^[1] . However, ordinary people and non-banking companies have not participated in it. Therefore, this new DBM will benefit everyone.

Two models of central bank digital currency

Mersch said that central bank digital currencies have two models: account-based and value-based. In addition, he also said that blockchain technology is absolutely capable of supporting both systems at the same time.

In the account-based DBM system, the central bank can open accounts for everyone (regardless of whether the other party is a bank or not) and directly handle currency transfers between accounts, similar to the operation mode of ordinary bank accounts. This process does not require electronic wallets, and the central bank controls the direction of currency and can also view all transaction history.

Another value-based model is very close to Bitcoin, which is similar to cash. Non-bank businesses or individuals can hold and use DBM through electronic wallets. Like cash, the central bank will not interfere in any currency transfer process, and the transaction history cannot be made public. Funds are traded directly between debits and credits in electronic wallets.

DBM transactions first require the funds to be credited to the electronic wallet of the debit party (the sender), and then to the device of the credit party (the receiver), a process that does not require the involvement of the central bank.

Mersch explained.

Only by adopting value-based DBM can anonymity be truly achieved. Such factors are also likely to affect the demand for DBM in the non-banking industry.

The incentives for central bank digital currencies

Mersch said that now is the best time to develop a central bank digital currency architecture for two specific reasons.

First, with the rise of electronic payment methods, the public's demand for central bank digital currency will also increase. Currently, commercial banks offer a variety of electronic payment methods, including credit cards, debit cards, and prepaid cards. Mersch believes:

People are more willing to use products issued by the central bank. After all, there are considerable risks in the operation of commercial banks.

Secondly, the development of emerging technologies such as blockchain has "simplified DBM's R&D process, and the R&D cost is several times lower than it was ten years ago." However, he did not mention Bitcoin.

It’s impossible to completely abolish cash

There has been a long history of speculation about the central bank abolishing cash. In response to this, Mersch emphasized:

If DBM can be issued smoothly, it will coexist with cash in the future.

He added that digital currencies are “just another way for the non-bank sector to control money.”

While cash usage is low in European countries such as Sweden and Denmark, Mersch said that in the eurozone "demand for physical money far exceeds economic output."

Before issuing a DBM, the ECB should have a deeper understanding of the concept of digital currency. Mersch said:

We must not only ensure that DBM does not bring any negative economic effects, but also ensure the safe and efficient operation of related systems.

Notes (↵ returns to text)

1. Deposit reserves refer to the deposits that financial institutions prepare to ensure that customers can withdraw deposits and clear funds. They are deposits deposited in the central bank.