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In a speech on Monday, Yves Mersch, Member of the Executive Board of the European Central Bank (ECB), discussed how the bank could design, issue, and manage a central bank digital currency for everyone, to be used alongside cash. One of the two types considered was a cash-like digital currency with anonymity.
The proposed central bank digital currency or Digital Base Money (DBM) is a digital equivalent of banknotes, representing a claim at the central bank. A form of DBM already exists, according to Mersch, in the form of central bank deposits for commercial banks. Households and non-banks, however, are excluded from this setup. The new DBM would include everyone.
Two Models for Central Bank Digital Currency
Mersch discussed two models for a central bank digital currency; account-based and value-based. He also said that blockchain technology has the potential to support both systems.
For an account-based DBM, the central bank would open an account for every interested non-bank and be directly involved in any money transfers between accounts similar to how a bank account works right now. No electronic wallet would be needed, but the central bank would be in full control of the money and could see its whole history.
The other option, one far closer in design to bitcoin, is a value-based DBM that is modeled after cash. Non-banks would have their own electronic wallets for holding and using the DBM. Just like cash, the central bank will not be involved in the money transfer process, there wouldn’t be a public history to follow, and funds are directly debited and credited from electronic wallets.
“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,” Mersch explained, noting that:
Anonymity towards the central bank can be achieved only with value-based DBM. These factors may influence the demand for DBM by non-banks.
Incentives for Central Bank Digital Currency
There are two reasons why this is the right time to start thinking about the mechanics of introducing a central bank digital currency, according to Mersch.
Firstly, public demand for a central bank digital currency could rise as the popularity of electronics payments increases. Currently, commercial banks offer various electronic payment methods including credit card, debit cards and prepaid cards. Mersch claims that, “People may prefer to hold claims on the central bank to avoid the risk that the commercial bank defaults.”
Secondly, new technological developments such as “blockchain” could make introducing DBM “much easier and potentially less expensive than ten years ago,” he added. No mention was given to Bitcoin.
Cash Won’t Be Abolished
Citing speculations that central banks will abolish cash, Mersch stressed, “if DBM for non-banks were introduced, it would exist alongside cash for the foreseeable future.” The central bank digital currency “would merely be an additional option for non-banks to hold funds,” he added.
While in some European countries, such as Sweden and Denmark, cash usage is low and sinking, in the Euro area Mersch revealed “the growth in demand for banknotes has by far exceeded that of economic output.”
Before the DBM could be issued, the ECB needs to better understand the options available and their implications, Mersch said. “We need to be sure not only that DBM is unlikely to have negative economic side-effects, but also that the relevant systems are operationally efficient and safe.”
What type of digital currency do you think the ECB would introduce? Let us know in the comments section below.
Images courtesy of Shutterstock, ECB, Boston Herald
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