Former IMF managing director and newly-appointed president of the European Central Bank (ECB), Christine Lagarde, says Europe’s central bank has set up a special committee to study the feasibility and “unintended side effects” of a central bank digital currency.
Lagarde made the comments at the end of a long interview she gave to Challenges magazine. The interview was published on January 8th.
In it, Lagarde discussed her leadership style, growth of the European economy, the effects of Brexit, national debt and surpluses in the Eurozone, the ECB and populism, price stability, negative interest rates, credit bubbles and the future of the euro on the world stage.
Interviewers Pierre-Henri de Menthon and Sabine Syfuss-Arnaud’s final question was regarding the matter of central bank digital currencies (CBDCs).
Bitcoin has been described by fans as an automated and stateless central bank for the Internet. Some of these fans like to think that the cryptocurrency phenomenon is forcing central banks to compete on the same playing field.
Central bankers like Augustin Carstens have argued that the work of central banks, (which is the bank for private banks) and private banks (which handle private deposits and loans) is separated for good reason. Central banks running a crypto treasury for the public would step on private banks’ toes, would be engaged in a conflict of interest, and their involvement in this way could contribute to economic instability during a downturn, Carstens has warned.
But Carstens and other central bankers, including Lagarde, have also stated a willingness to consider cryptocurrencies and CBDCs.
Challenges Journalists de Menthon and Sabine Syfuss-Arnaud asked Lagarde, “Is creating a cryptocurrency a legitimate task for the ECB?”
Lagarde started by stating that banks in Europe have already produced a fast coordinated payments system:
“Innovation in the area of payments is racing ahead in response to the urgent demand for quicker and cheaper payments, especially cross-border ones. The Eurosystem in general and the ECB in particular want to play an active role in this field, rather than just acting as observers of a changing world.”
“In 2018 the Eurosystem launched an infrastructure to provide pan-European instant payments with direct settlement in central bank money (TIPS, i.e. TARGET Instant Payment Settlement). This enables banks to process payments between themselves in a matter of seconds, 24 hours a day, 365 days a year, all over Europe. This caters not only to the preferences of younger generations, who want to make round-the-clock payments with their smartphones, but also to firms, which want to optimise payment and supply chain processes.”
Some see CBDC’s as inevitable as use of cash dwindles in some developed regions, but Lagarde has previously cautioned about how a cashless society would disenfranchise the poor and unbanked.
A cashless reality has nonetheless not gone unconsidered at the ECB, Lagarde said:
“In terms of the road ahead, the ECB will continue to assess the costs and benefits of issuing a central bank digital currency (CBDC) that would ensure that the general public remains able to use central bank money even if the use of physical cash eventually declines.”
Lagarde was also cautious about not making life unfairly hard for private finance:
“However, the prospect of central bank initiatives should neither discourage nor crowd out private market-led solutions for fast and efficient retail payments in the euro area.”
Accordingly, “We are looking closely into the feasibility and merits of a CBDC, also because it could have major implications for the financial sector and for the transmission of monetary policy.”
A special task force to consider CBDC’s is now in place at the ECB, Lagarde said:
“At the end of 2019 we created an expert task force at the ECB that will work closely with the national central banks to study the feasibility of a euro area CBDC in various forms, covering all the practical aspects, including how to minimise possible unintended side-effects.”