Central banks examine the pros and cons of digital currency in the US and Europe

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  • The Bank for International Settlements and seven central banks are exploring how to launch CBDCs and have flagged key issues that will need to be addressed, including interoperability and privacy.
  • In the United States, Federal Reserve leaders have questioned the need for a CBDC, given the sophistication of existing payment systems. Offering retail accounts to the Fed would also fundamentally change the structure of the US banking industry.
  • The Bank of England and the UK Treasury have formed a task force and plan to consult on the merits of a CBDC.
  • In Europe, with more decentralized banking and payment systems, the European Central Bank has shown greater enthusiasm for implementing a CBDC, saying it could spur innovation

The advent of distributed ledger technology and other innovations has led to the widespread adoption and use of private digital currencies such as bitcoin and ether, which enable fast payments with minimal transaction costs. This phenomenon has prompted central banks around the world to assess their role in the digital asset economy, in particular by examining the pros and cons of offering a central bank digital currency (CBDC) to the public.

CBDCs would be liabilities of the central bank that issued them and could be either large (that is to say., accessible only by financial institutions, similar to existing central bank settlement accounts) or retail (that is to say., the digital equivalent of cash, intended for use as a digital payment instrument by the general public).

China has already launched its version of a general purpose CBDC. But, while there is real exuberance and interest in the possibility elsewhere, central banks in most major economies are acting cautiously.

International exploration of CBDCs

One of the most serious international efforts to explore the usefulness of a CBDC system is led by the Bank for International Settlements (BIS) and the central banks of seven jurisdictions (Bank of Canada, Bank of England, Bank of Japan , European Central Bank (ECB), Federal Reserve, Sveriges Riksbank and Swiss National Bank). This effort has already identified significant challenges that must be addressed when designing an effective CBDC arrangement, including the need to:

  • establish interoperability between a CBDC and other key payment systems and arrangements within a jurisdiction to facilitate the smooth flow of funds needed to provide accessibility, resilience and diversity of payments;
  • protect the privacy or confidentiality of consumer payment data;
  • allow sufficient transition time for the existing financial system to adapt; and
  • maintain design flexibility to adapt to changing user needs over time.

Individual countries could also face unique legal and structural challenges within their jurisdiction.

United States

In the United States, the fundamental question is whether a general-purpose CBDC is necessary, given the variety of private electronic payment options available in the existing payment system, including online bill payments via banks and payment methods such as PayPal, Zelle and Venmo. . They already offer speed and accessibility and are inexpensive.

Key Federal Reserve governors have expressed skepticism. President Jerome Powell observed that the United States already has a “secure, efficient, dynamic and efficient national payment system”. [capable of serving] the needs of households and businesses. Fed Governor Christopher Waller said it was unclear whether “the CBDC will resolve any existing issues that are not being resolved more quickly and efficiently by other initiatives.”

Additionally, a retail CBDC for which the Fed provides accounts directly to the general public would require legislative changes and profoundly alter the central bank’s role vis-à-vis private commercial banks and the US economy. Under current law, the Fed provides accounts to private commercial banks, which then offer bank accounts to the general public. This structure, in which private commercial banks are intermediaries between the Fed and the public, dates back to the negotiations that gave birth to the Fed in 1913. Providing accounts directly to the public would upset this negotiated balance and could disintermediate private banks by encouraging deposits. move from them to the Fed.

These factors weigh heavily against an account-based retail CBDC in the United States, regardless of the advantages it might offer in terms of speed, availability, accessibility and cost, especially since the competition and other initiatives such as FedNow (the Fed’s instant payment system due to launch in 2023) aim to address these issues. It is therefore very unlikely that we will see a retail CBDC in the United States in the next few years.

Nevertheless, we expect the Fed to continue to participate in CBDC discussions in the United States and abroad so that it can maintain its leadership and influence in setting standards for their design and issues. related policies.

UK

The structural and conceptual issues of a central bank adopting a CBDC in the UK and Europe have also generated substantial interest, with central banks themselves and other market participants debating the benefits, challenges and legal requirements. and regulatory.

In November 2021, the Bank of England and the UK Treasury announced plans for a joint consultation on the subject in 2022. They envisage the introduction of a CBDC in the UK by the end of the decade. there is the support of market players. The two bodies have formed a working group to oversee the consultation and any future consideration of such a proposal.

However, several problems in terms of design, control, access, legal framework and regulation remain before such an initiative can be implemented. Like the Fed in the United States, the Bank of England does not provide accounts directly to the general public. Adopting a “retail” CBDC that would require it would therefore entail a seismic shift in the UK banking system.

The UK Treasury has previously stated that it sees any CBDC as a parallel offering to existing cash and bank deposits, not a replacement. The outcome of the consultation will determine whether the UK moves into a “development” phase.

Eurozone

Unlike US regulators, the ECB has been quite public in its support for the development of a mid- to long-term CBDC.

In a report published in October 2020, the ECB advocated the introduction of a digital euro, which it says is necessary to support innovation, provide strategic autonomy and guarantee the security of European payment systems. ECB Executive Board member Fabio Panetta argued in a blog post in November 2021 that the ECB needed to actively consider the role of a CBDC given the shift to digital payments rather than cash. He made the analogy of the postage stamp falling by the wayside in the age of the Internet.

This shift to digital payments is driving much of the thinking about the development of CBDCs in Europe and the UK. Mr. Panetta also argued that central institutional involvement in money, whether through a CBDC or otherwise, will remain a cornerstone that underpins trust in the value of money and the financial system, and that development work and debate is needed now to address the structural and regulatory challenges of a CBDC.

The ECB’s plan focuses in particular on a “retail” CBDC, which would mark a significant shift in the current payments ecosystem if adopted. To the extent that the ECB has focused on wholesale systems, it has focused on technical upgrades to existing systems rather than the introduction of a CBDC.

We anticipate that central banks in the UK and Europe will continue to explore CBDC models, with increased attention over the next few years. Much of this work will be preparatory and technical rather than moving quickly into adoption. But central banks in the region seem much more open to the introduction of CBDCs later in the decade than their counterparts around the world.

This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered publicity under applicable national laws.

Sylvia B. Polson