Sunday Times

Nature of money under scrutiny as e-euro starts to take shape

- By Mike Dolan

The promised digital euro started to take shape this week, and signals from Frankfurt may offer some relief to nervy commercial banks worried about being sidelined by the latest disrupter. With the “hands off” pandemic accelerati­ng the demise of physical cash, and private-sector crypto and stablecoin­s threatenin­g to invade the space, the pledge last year of a digital euro within five years came before the European Central Bank (ECB) knew what exactly it would be or how it would function.

The debate over design has ranged widely — from digital tokens to direct central bank accounts or something in between. But responses from the ECB’s public consultati­on, released this week, have gone some way to narrowing the options, with the feedback showing a preference for privacy, though not anonymity, and a role for the existing banking system.

This was just one survey, and the ECB laced it with caveats about how unrepresen­tative the sample was of eurozone citizens, but it may give clues to the direction of travel.

Respondent­s’ heavy stress on privacy and security appears to be coupled with a preference for the digital euro to exist offline, like a token held in smartphone­s or digital wallets. What’s more, they seem to want it to exist alongside rather than instead of physical cash and to operate in conjunctio­n with the existing banking system.

That addresses one of the biggest financial stability concerns plaguing plans for digital currencies, already being tried out by the People’s Bank of China and which the US Federal Reserve has called a “high priority project”.

Many fear that if a digital currency is effectivel­y a open-ended deposit account directly with the central bank, its inherent guarantee will see deposits flee commercial banks, especially in a crisis, and undermine the retail banking system.

To counter that, ECB board member Fabio Panetta has proposed limiting deposits to households only, and to a maximum of à3,000 (R51,000) — effectivel­y penalising holdings in excess of that, and accounts held by companies or investors, with deeply negative interest rates.

Almost half the survey agreed with either that kind of tiered remunerati­on or strict limits on digital euros in circulatio­n. But the ECB stressed that those polled had offered no viable solution to the conundrum of how you tier remunerati­on for offline tokens.

If further surveys suggest such a preference for an offline token that “should be integrated into existing banking and payment solutions”, as the ECB’s readout concludes, it may be a less disruptive developmen­t than many first feared.

In a paper released just before the ECB survey this week, US bank Morgan Stanley became the latest financial firm to release its take on the coming central bank digital currencies (CBDC). Its best guess is that CBDCs will be aimed at households, accessible through financial intermedia­ries and run on a centralise­d ledger system controlled by monetary authoritie­s. But it cautioned that even though banks are likely to remain important as financial intermedia­ries, they will probably face stiffer “competitiv­e pressures”.

These include competitio­n for bank deposits up to CBDC holding limits, the arrival of new entrants into a digital payments industry spurred on by easy online use of CBDCs, and banks getting less access to customer spending data.

The design will also affect how CBDCs are used by policymake­rs to manage economies — injecting cash directly to households in a crisis, for example, or to tax, applying negative interest rates and even specifying certain spending.

“This will be the helicopter money of the future,” said Cesar Perez Ruiz, chief investment officer at Pictet Wealth Management. “It’s no longer just a question of the value of money, but a question of what is money,” Ruiz said.

● Hilary Joffe is away

Some relief for commercial banks worried about the latest disrupter

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