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ECB executive board member talks about current state of digital euro CBDC research

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When speaking at the IESE Business School Banking Initiative Conference on Technology and Finance on Friday, European Central Bank (ECB) executive board member Fabio Panetta gave an outline of the central bank’s ongoing study on a retail central bank digital currency. Central bank digital currencies, or CBDCs, are “likely to become a need,” according to Panetta, but “they should not become a cause of financial disruption that may hamper the transmission of monetary policy in the euro area,” he cautioned.

Giving commercial banks participation in the process, according to Panetta, will be critical to ensuring financial stability during the transition to digital currency. As the central bank benefited from the banks’ knowledge in customer onboarding and anti-money laundering, this would allow them to continue offering front-end services.

Banks might play a similar role, according to a discussion paper released by the Federal Reserve in January. Financial intermediaries may play a role in maintaining consumer privacy, according to the report. Privacy concerns have also been addressed by the European Central Bank (ECB).

“As demand for cash declines, issuing CBDCs might ensure that sovereign money continues to play its role in underpinning confidence in money and payments,” Panetta added, while also encouraging competition among banks “by diminishing banks’ market strength and enhancing contractual terms for clients”.

Proper CBDC design is crucial

The need for proper CBDC design is demonstrated by research on the complicated potential linkages between CBDCs and monetary policy, according to Panetta. “We need to resolve the ‘CBDC trilemma,’ which states that central banks’ payment efficiency, financial stability, and price stability objectives cannot all be met at the same time,” he stated.

The rapid evolution of different forms of digital assets “whose appearance alongside fiat money in the past 10 years has been quick and had a significant effect – equivalent to the Cambrian explosion of 20 to 25 million years ago” makes designing a digital currency difficult. Nonetheless, Panetta concluded that the lack of a sufficient CBDC to counteract the influence of other digital assets would pose “risks to monetary sovereignty, central bank lender of last resort functions, and financial stability.”

MIT adds the Bank of England to its stable of CBDC digital currency research partners

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