Currency is part and parcel of monetary policy, and a public mandate of the European Central Bank (ECB). TFG’s Editor, Deepesh Patel, spoke to ECB’s Yves Mersch about the possibilities of central bank digital currencies in relation to payment systems, faster transaction times and settlements. Separating the hype from reality; Mersch spoke to TFG about the regulatory consequences of central bank digital currencies. “We are tech neutral. We want to stay ahead of tech. Tech has to serve our purpose, not the other way around.”

Featuring: Yves Mersch, Vice Chair of the Supervisory Board, European Central Bank

Host: Deepesh Patel, Editor, Trade Finance Global

Deepesh Patel: Mr. Mersch, hello and welcome to Trade Finance Talks TV.

Yves Mersch: Hello, and thank you for inviting me and welcome here in Frankfurt as well.

DP: So Mr. Mersch, here we are at Frankfurt, at the ECB, during the time of the BAFT Global Annual Meeting, given your recent appointment as Vice Chair of the Supervisory Board at the ECB, can you give us a quick introduction? Who are you? What do you do and where are you from?

YM: Yes, just like you, I’m not a native Frankfurter. I am a guest worker here. Nevertheless, since the beginning of the ECB, I have been a member of the Governing Council, because I was a Governor of a national central bank, which participated in the Euro from ’98 on. And in 2012, I assumed the mandate of the ECB’s Executive Board which is responsible for the daily management of the European Central Bank. And then last year, I was, as a member of the Executive Board, also put in charge of doing the hinge or the connection between the Executive Board, the Governing Council and the supervisory side. And as such I have been appointed as Vice Chair of the Supervisory Board.

Digital Currencies – An ECB Perspective

DP: Let’s talk about digital currencies. Do you see digital currencies as disruptive; or do you see them as innovative within ECB and Central Banks more generally?

YM: Well, first of all, currency is part and parcel of monetary policy. It is one of the four indents which are foreseen in the Treaty and what we do. That is: define and implement monetary policy, manage reserves, but also promote safe, and I repeat, safe and efficient payment systems. So this is a mandate that we have received from the legislator and not only the legislator because this Treaty was in many countries approved by referenda. So it’s a direct mandate from the people of Europe. And that’s why we consider that issuing a currency that is widely used and which benefits from legal tender status is a public mandate. And this is not something that, because of some whimsies of private shareholders, we could privatise from one day to another. Because this has to do also with the confidence of people and the trust of people in the issuance of widely trusted and stable currency. The currency that is stable – that is our mandate. So, it is not something that we are able to hand over to the private side.

Now, obviously, if there are two private parties, who would like to trade and use as a currency, their mutual ties, they are welcome to do so. But this would not be legal tender and not widely recognised. So, this is one thing that is about currency; and who is the issuer of currency and why it is a public mandate. Because currency, it’s like a flag or an anthem, a national anthem. It’s a public mandate. And everything that goes beyond the national anthem is of course, a private matter. Now, we still have to make sure that we have efficient payment systems. Now the payment systems are not only an issue that is linked to one technology or another technology. We are now issuing already liabilities of the Central Bank in forms of paper currency. Tomorrow, if people would say we prefer plastic currency or polymer currency, we would have to issue polymer currency. And that’s why we follow the technological development of what is required very closely in order to be able to live up to the expectations.

The same goes if people would say we don’t like currency anymore, which is not what we see in Europe. Quite to the contrary, people continue to have a likening of cash, whatever is being written in numerous articles. So we have to deliver to the request of the people. If there would be a dislikening of cash tomorrow, then we should also be ready to offer the public whatever liability to the central bank they would like to have. And that is what we are presently doing. So, that is quite different from what I would call a privatisation of issuance of currency, whether you call it crypto asset or cryptocoin whether you call it stable coins or whatever.

Wholesale versus Retail Payments

Now, this being said, even in the digital area, digital currency area, you have to distinguish between wholesale payment and retail payment. In a wholesale area, which means mainly with the banks or those with whom we deal mostly, we are already up to 90% fully digital. Only, we don’t call it that way. But all our transactions are done in electronic book entry form. So, from that point of view, if we speak about digital currency in the whole bank, in the wholesale market, it applies more to who would have access to the central bank balance sheet. For the moment, it is mostly only the banks; in the future, is there a need to give access also to other entities like FinTech or like financial market infrastructures, as some countries have done it? That is the remaining discussion, we are presently doing. 

And the second is in retail, that is of course affecting the public at large. But I said first we have to see what this request is and what is the need of the public. Second, we have to identify what are the different possibilities of a central bank digital currencies, what are the design features, which we want to pursue. How far would we like to go? If we want to stay in the pure area of payment systems, don’t forget that we have already right now a solution for faster payments, which is called TIPS. And this is of course in the payment transaction, only the last stage of payment, mainly the settlement. But we have not moved to the issuance, to the front end of the individual payment transaction. But settlement could be done with our technology already right now, in less than a few seconds per transaction and at a cost of less than 0.2 cent. This obviously is much cheaper and much faster, than any cryptocurrency is able to offer to private transactions. And I have not heard anything like also from stable coins‘ potential offerings. So what we want to do is to separate the hype and the announcement from reality.

What is TIPS?

Central Bank digital currencies

And we are monitoring the evolution of technology. We are testing the different technological products to see what would be possible, what would be technically feasible for us, what would be legally feasible for us. And there is a huge variety of possibilities in Central Bank digital currency, which would have more or less revolutionary consequences. It could affect the whole financial ecosystem, it could wipe out the banking system. Do we want to do that? Then: who will issue the economy with loans? If it is not the banks who have the deposits that they transfer into loans, they would need to raise money somewhere else. That will increase their funding costs in order to cover it, they need to take more risks and so on. What is the question of the feature of anonymity that people have with cash as it is present? What if we would directly access the clients as we do it now with cash? Or would we limit it? If we limit it is there another risk that we would have two currencies, that we would issue? Which would raise the question of convertibility between the two issues.

No, we are tech neutral. We want to stay ahead of tech. Tech has to serve our purpose, not the other way around.

Yves Mersch, European Central Bank

So there are a lot of questions that need to be discussed. And that is what we are presently drilling down to, to increase our knowledge from the technical and academic, I would say, side, but we are very far away from a political decision on implementation. We only want to be ready, because at the end of this process, we have to make an assessment. What are we pursuing? What is the shape of the product we want to offer? What are the consequences, if we would do that? Would it not also shape all our existing monetary policy instruments, from how is the transmission mechanism of monetary policy to the economy affected? All these are questions, which need thorough preparation and this is a little bit more complex than just saying: you are tech-friendly, you are tech-averse, why don’t you like this one, why do you prefer that one? No, we are tech neutral. We want to stay ahead of tech. Tech has to serve our purpose, not the other way around.

DP: I completely agree with you and I think it’s extremely important to consider the real business models and the problems versus what are the new technologies that we can potentially implement for the sake of implementing them. Thank you very much, Mr. Mersch.