Weidmann during his speech at the virtual autumn conferenceof the Bundesbank ©Nils Thies

Weidmann identifies risks and rewards in central bank digital currency

Bundesbank President Jens Weidmann feels that the introduction of digital central bank money (CBDC) must be carefully considered. He referred to the opportunities it would bring with it, but also said that the various risks entailed suggested that a prudent design and cautious approach would be essential. Many issues surrounding CBDC still required further analysis, as he explained during a podium discussion with Governor of the Banque de France François Villeroy de Galhau at the Bundesbank’s virtual autumn conference. In the debate on the future of payments, consumers’ preferences and needs should be front and centre, Mr Weidmann argued. “The general public want quick, convenient, secure and cheap payment methods – including for payments abroad. That, however, does not necessarily require CBDC,” the Bundesbank President said. In a market economy, he explained, offering innovative payment solutions should be a primary task of the private sector.

During the two-day virtual conference, representatives from academia, central banks and government agencies analysed and discussed current developments in and the future of the financial and banking sectors.

Keep an open mind

Mr Weidmann said that Bundesbank staff across various business units are currently taking a closer look at the opportunities and risks presented by CBDC. It would be wrong, however, to interpret this as a decision in favour of CBDC. A thorough understanding was needed before the arguments could be weighed. It was important to keep an open mind.

“Central banks are not intending to abolish cash,” Mr Weidmann assured. Cash is presently the only way for private individuals to hold central bank money. It provides privacy, and its use does not necessarily depend on technical infrastructure, which is why many people value it very highly. However, he continued, the importance of cash has declined in many countries, with the COVID-19 pandemic giving cashless payments an added boost. “Whether this shift in payment habits will be permanent or goes even further remains to be seen,” he said.

Villeroy: We must remain innovative

In his presentation, Mr Villeroy de Galhau emphasised that innovativeness in the euro area should not be lost. According to the Governor of the Banque de France, the debate surrounding central bank digital currency is often based on the misconception that it automatically crowds out other innovations in the field of payments. Innovations must not be confined to the private sector. “We must remain innovative,” said Mr Villeroy de Galhau. He warned against delaying the decision for or against central bank digital currency for too long, saying that “We do not have much time to decide this consistent European payment strategy: one to two years.”

Lagarde: Decision to implement central bank digital currency not yet taken

Like Mr Weidmann, ECB President Christine Lagarde, who also spoke at the conference, likewise stressed that central bank digital currency would be a complement to and not a substitute for cash. “The Eurosystem will continue to ensure that all citizens have access to banknotes at all times,” Ms Lagarde reinforced. According to the ECB’s new payments survey, cash remains the most common way of making small retail payments. “But almost half of consumers said they prefer to pay digitally, and this has increased further during the pandemic,” she added.

According to the ECB President, the ECB and the euro area central banks have not yet made a decision on whether to introduce a digital euro. “But, like many other central banks around the world, we are exploring the benefits, risks and operational challenges of doing so,” Ms Lagarde said, adding that introducing a digital euro would allow the ECB and the national central banks of the euro area countries to be at the cutting edge of innovation. However, the associated risks also had to be taken into account. The findings of a central bank taskforce are expected to be presented to the public in the coming weeks.

Brunnermeier: Digital currencies will change the world

In his speech, Markus Brunnermeier, Professor of Economics at Princeton University, confidently predicted that digital currencies will assume greater significance in public life in future. “Digital currencies will change the financial world, particularly when combined with non-financial data such as data from social networks,” Mr Brunnermeier said. Against such a background, official currencies would be in with a chance of remaining attractive. In order to retain monetary sovereignty and thus steer the economy, central banks would have to be granted the function of cash as a general unit of account and be able to intervene as a lender of last resort, according to Mr Brunnermeier. In future, he believes that data protection while conducting cross-border payments with virtual currencies will be a major topic, as each country will have different rules concerning this.