European Bank Official Discusses Potential Benefits of Central Bank Digital Currency

A European Central Bank (ECB) official highlighted the benefits of central bank digital currencies (CBDC) while stressing caution in a speech published by the Bank of International Settlements on May 27.

Vitas Vasiliauskas — Chairman of the Board of the Bank of Lithuania and a member of the Governing Council of the ECB — delivered his speech at the Reinventing Bretton Woods Committee conference "Managing the Soft Landing of the Global Economy" on April 12. Vasiliauskas specifically considered whether CBDCs should be wholesale, retail, or both.

Vasiliauskas stressed that CBDCs should serve as a medium of exchange, a means of payment and a store of value, reflecting qualities of the current forms of central bank money, but not a conventional reserve account or a private crypto asset. In the event of the release of the retail CBDC, it would be available to the general public, while access to the wholesale one would be open to financial institutions only.

Among potential benefits from the CBDC, Vasiliauskas named increased efficiency of payments and securities settlements, and reduction of counterparty credit and liquidity risks. The interest-bearing retail CBDC could purportedly improve the transmission of monetary policy and strengthen the pass-through of the policy to deposit and lending rates. However, Vasiliauskas further warned:

“The amount of cash in circulation is declining in some countries. This could mean that one day, even if it seems like a distant prospect — every single person will have to have an account with a private entity just to make payments. Unfortunately, this may lead to increased levels of financial exclusion.”

A retail CBDC would thus ensure that people continue having access to central bank money, Vasiliauskas said, and could eventually have positive effects on financial stability. In the meantime, one of the key issues the central bank should consider is the CBDC’s adherence to the money laundering requirements and the way it can apply the anti-money laundering (AML) standards to anonymous forms of CBDC.

Earlier in May, the ECB released a report on the potential impact of digital currencies on economic developments and monetary policy, where it specifically states that such implications could occur should cryptocurrencies became a credible substitute for cash and deposits, while currently they do not fulfil the functions of money.