European union plans on the e-Euro (CBDC):
Cross post - better suited in here:
EZB Report on a digital euro:
https://www.ecb.europa.eu/pub/pdf/other/Report_on_a_digital_euro~4d7268b458.en.pdf
edit:
This report examines the issuance of a central bank digital currency (CBDC) – the digital euro – from the perspective of the Eurosystem. Such a digital euro would be a central bank liability offered in digital form for use by citizens and businesses for their retail payments. It would complement the current offering of cash and wholesale central bank deposits.
Split the money base.
A possible role for the digital euro as a tool to strengthen monetary policy is not identified in this report, but could emerge in the future on the basis of further analysis or owing to developments in the international financial system.
PR first?
The Eurosystem would design the digital euro in such a way as to avoid possible undesirable implications for the fulfilment of its mandate, for the financial industry and for the broader economy. Some digital euro design options could affect the intermediation function of banks and their funding costs, especially in situations of stress. Furthermore, some potential configurations of a digital euro could lead to an Report on a digital euro 4 expansion of the size of the Eurosystem’s balance sheet and increase its exposure to shocks and could give rise to challenges in international financial markets related to larger capital flows. However, the analysis in this report indicates that by following appropriate strategies in the design of the digital euro the Eurosystem can address these challenges.
Commercial banks and large scale investors are safe - we promise.
Also promises of not inflating the money pool ("state investments into peoples abilities to purchase retail") (with negative interest you get the desired effects).
Most users and investors are also concerned that emerging private payment solutions (especially if unregulated) could entail cyber risks.
The boogey man can!
In the case of a digital euro, such risks might be mitigated by the involvement of the central bank. Finally, the issuance of a digital euro could stimulate the supply of new payment services and functionalities and create business opportunities, although it could also generate new sources of risk.
You know, the commercial banking sector really had too few business opportunities in the past...
Scenario 4: if the Eurosystem were to conclude in the future that the issuance of a digital euro is necessary or beneficial from a monetary policy perspective. For example, the introduction of a CBDC might reinforce the transmission of monetary policy by allowing the central bank to set the remuneration rate on the digital euro in order to directly influence the consumption and investment choices of the non-financial sector, although the strength of this mechanism is not clear cut18 (the effect of the digital euro on monetary policy is examined in more depth in Section 3).
Bingo.
edit Footnote 18:
18 A CBDC could help to eliminate the effective lower bound on policy rates, and thereby widen the policy options available in crisis situations, if cash were to disappear. This may be considered particularly important in view of the decline in the neutral real rate (== cumulative interest). However, to the extent that cash remains available in the economy, this objective becomes less relevant. See Lalouette, L. and Esselink, H., “Trends and developments in the use of euro cash over the past ten years”, Economic Bulletin, Issue 6, ECB, 2018.
Bingo 2:
Requirement 4 (R4): monetary policy option. If considered to be a tool for improving the transmission of monetary policy, the digital euro should be remunerated at interest rate(s) that the central bank can modify over time.19
Footnote 19:
19 There may be other reasons to remunerate the digital euro at a variable rate, namely financial stability reasons and to prevent the central bank becoming a large-scale financial intermediary if the digital euro becomes a large-scale store of value.
Yeah we dont want it to be a value store option, do we..
• The excessive use of the digital euro as a form of investment and the associated risk of sudden large shifts from bank deposits to the digital euro should be avoided. The digital euro should be available via supervised intermediaries, while IT project risks (for example, project delays or unexpected costs) should be minimised. The Eurosystem should aim at complying with regulatory standards even when exempted, unless it is clearly in the public interest not to do so.
Split the money base.
Effects on the banking sector, monetary policy and financial stability
The introduction of a digital euro could affect the transmission of monetary policy and have a negative impact on financial stability, for example by challenging banks’ intermediation capacity and by affecting risk-free interest rates. Depending on its characteristics as a form of investment, it might induce depositors to transform their commercial bank deposits into central bank liabilities. This might increase the funding costs of banks and, as a consequence, interest rates on bank loans, potentially curtailing the volume of bank credit to the economy. Banks could react to this trend in different ways. One possibility would be to try to stabilise deposits by increasing their remuneration or by bundling them with additional services (for example, payment services, mortgages, etc.). Second – unless the central bank increases its outright holdings of securities, thus increasing the supply of liquidity on a permanent basis – banks could replace lost deposit funding with central bank borrowing, provided that they have adequate collateral (in terms of both quality and quantity). This would imply an increase in demand for collateral, which might ultimately have an impact on market interest rates for safe assets; moreover, the central bank would expand its role in the economy and its risk exposure. Finally, to the extent that the central bank increases its outright holdings of securities, banks could still try to substitute deposit funding with more expensive capital market-based funding. Substantial demand for digital euro may also have a negative impact on financial stability, given the key role of the banking sector in financial intermediation. Were this demand to increase their funding costs, banks might have to deleverage and decrease the supply of credit, thus preventing an optimal level of aggregate investment and consumption. If this process ultimately implies higher costs for borrowers, economic activity could be hampered. Moreover, if their traditional business model is compromised, banks may decide to take on greater risks in an attempt to earn higher (nominal) returns and to offset the reduction in profitability.32 Additionally, if banks decrease their role in deposit-taking and intervene less in the routing of payment instructions, they might have less information about clients, which, in turn, would harm their risk assessment capacity. This may increase the riskiness of banks’ balance sheets, with negative effects on financial stability. Furthermore, investors may substitute safe assets (for example, sovereign bonds) with the digital euro, which would directly affect risk-free interest rates and indirectly affect other risk classes.33 In crisis situations, when savers have less confidence in the whole banking sector, liquid assets might be shifted very rapidly from commercial bank deposits to the digital euro if the operational obstacles to withdrawing money in the form of digital euro are lower than for withdrawing cash. This could increase the likelihood and severity of bank runs, weakening financial stability. These examples highlight that the design of the digital euro needs to be carefully assessed, taking into account its implications for such important issues as monetary policy transmission and financial stability. Consideration should be given, inter alia, to whether a digital euro should be accessible by households and firms directly or indirectly through intermediaries, whether it would be remunerated, and whether digital euro holdings of individual users should be limited or unlimited. For instance, the central bank might mitigate potential effects on the banking sector, financial stability and the transmission of monetary policy by remunerating digital euro holdings at a variable rate over time,34 possibly using a tiered remuneration system, or by limiting the quantity of digital euro that users can hold and/or transact.
Footnote 34:
34 A non-interest-bearing or positive interest-bearing digital euro is more likely to induce large-scale substitution away from deposits in a negative interest rate environment. While banknotes already offer a non-interest-bearing alternative to deposits, storage and insurance costs mean that deposit rates can be below zero without triggering large-scale substitution into cash. Holding digital euro would likely entail lower costs than holding banknotes, implying that large-scale substitution into non-interest-bearing or positive interest-bearing digital euro would be more likely – at any given negative rate on deposits – compared with substitution into banknotes.
Oh, what could we do - what could we possibly do??!?
Next paragraph:
Given the risks for monetary policy transmission and financial stability, it is not desirable for the digital euro to attract very large investment inflows. However, if individual holdings of digital euro were too low, either because of rigid constraints or because of disincentives applied above a relatively low threshold, then the digital euro would be less attractive as a means of payment and less competitive than alternative instruments.35 To address the aforementioned risks, the central bank should design the digital euro in line with the following requirement:
Requirement 8 (R8): ability to control the amount of digital euro in circulation.
The digital euro should be an attractive means of payment, but should be designed so as to avoid its use as a form of investment and the associated risk of large shifts from private money (for example bank deposits) to digital euro.
BINGO!
edit: Oh, and its green!
Although the central bank would not aim at expanding its intermediation role, this possibility cannot be ruled out. In this case it could be forced to invest more in illiquid assets, ultimately taking on more credit and market risk. As profitability is not, per se, a policy objective of the Eurosystem, these considerations would have no immediate implications for the design of a digital euro. A central bank issuing a CBDC should nonetheless strengthen its risk management.
edit: This gets better by the minute:
Requirement 13 (R13): conditional use by non-euro area residents. The design of the digital euro should include specific conditions for access and use by non-euro area residents, to ensure that it does not contribute to excessively volatile capital flows or exchange rates. Such conditions could take the form, for instance, of limits on or adequate remuneration policies for the holdings of digital euro of non-euro area residents.
Better by the minute:
Oh now - we might have to eliminate privacy - because we cant allow to much investment money to cross over.
Privacy requirements Users’ privacy can be protected to various degrees, depending on the preferred balance between individual rights and public interest. Means of payments in current use already provide varying degrees of privacy, ranging from anonymous cash transactions to transactions requiring documentary verification or monitoring via bank accounts.46 If the legal identity of digital euro users were not verified when they access services, any ensuing transaction would be essentially anonymous.47 While that is currently the case for banknotes and coins, regulations do not allow anonymity in electronic payments and the digital euro must in principle comply with such regulations (Requirement 10). Anonymity may have to be ruled out, not only because of legal obligations related to money laundering and terrorist financing, but also in order to limit the scope of users of the digital euro when necessary – for example to exclude some non-euro area users and prevent excessive capital flows (Requirement 13) or to avoid excessive use of the digital euro as a form of investment (Requirement 8).
edit: Oh wow! You can even keep petty crime, we only want negative interest.
If users are identified when they first access digital euro services, different degrees of privacy can still be granted by both the issuer (the Eurosystem) and the providers of intermediary services. Full privacy would be typical of offline digital euro payments, in line with Scenario 2 (a decline in the use of cash), even when users have been identified by the provider(s) of digital euro services beforehand. Indeed, the absence of a data connection with a third party implies that sharing transaction data is not necessary for payment settlement.
edit:
One option to be investigated would be to allow users to hold digital euro only up to an individual threshold at any given time. To ensure that a user can always receive a payment in digital euro and no information is disclosed on current individual holdings, a “waterfall” approach would be possible whereby any incoming digital euro in excess of the holding limit would be shifted automatically to the payee’s account in private money. However, this would require all payees to hold such an account.49
Dont worry, our next monetary policy only concerns your "overflow income".
Demand for a digital euro could also be controlled through incentive schemes under which less attractive interest rates or service fees are applied when individual holdings exceed the aforementioned threshold.
Be creative with negative interest rates to increase compliance.
It does not seem feasible, under current circumstances, to offer unlimited holdings of digital euro to corporate entities at zero interest rates. In line with the current monetary policy stance of the ECB, the nominal remuneration rate of risk-free euro investments (for example AAA-rated government bonds with a short residual maturity) achievable by corporate entities and domestic and international investors is currently below -0.5%. Unconstrained access of these entities to a digital euro could not be offered currently at more attractive rates without disrupting financial flows and the monetary policy stance.
Lets start at -0.5%.
edit: In case a more 'anonymous' private payment option is needed (classified as cash use declines), you might have two models of the digital euro. One based on a balance sheet ('bank account') held by the ECB, and one based on 'distributed ledger' - both holding 'e-Euro'. In the second case, you would be loosing ECB liability in the instances of loss of device, or fraud.
Most of daily e-Euro transfers in 'offline mode' (without privacy loss) could even be ensured, by "hardware security modules" on "registered devices".
An electronic payment that is not confirmed online – either through the network of users or in a central register – can still be considered final by relying on “trusted hardware” modules. Offline functionality avoids the sharing of transaction details with parties other than the payer and payee, enabling the digital euro to become a complement to cash (Scenario 2) and providing a back-up payment solution that is available in extreme situations (Scenario 5).53 These modules are increasingly available to potential digital euro users in the form of smart cards, mobile devices and payment terminals. The payment could be settled immediately as a transfer of pre-funded units between the devices of payer and payee. Payment devices could be pre-funded with an amount of digital euro deducted from the balance that a user has online before they are used offline. The trusted device would contain the current balance and adjust it upon payment by the user. On the side of the payee, usually equipped with a terminal, the transfer would be recorded with the necessary information to prove that the transfer was indeed finalised.
Bye by people owning their phones (rooting them).
edit:
However, the remuneration applied to a digital euro stored offline could not be changed by the central bank over time since it would not be possible to communicate with the device (Scenario 4). Moreover, a digital euro that is only usable offline would be unlikely to support new advanced functionalities such as conditional payments (Scenario 1). An offline digital euro would need to exist online at some point, in order to allow users to load money onto the offline digital euro wallet through the broader payment system; hence, any offline digital euro should also be linked to an online form of digital euro.54
edit: Also interesting:
As already mentioned, remuneration could be tiered, with different interest rates applied in different cases. This would, for example, allow the Eurosystem to pay less attractive interest rates on large holdings of digital euro or on holdings by foreign investors in order to discourage excessive use of the digital euro as an investment or to mitigate the risk of attracting huge international investment flows.
edit: Remuneration of digital offline money (cash equivalent), although technically difficult - might not be out of the question;
It could be argued that the non-remuneration of banknotes creates unintended effects, as the opportunity cost of holding banknotes varies with central bank and market interest rates. From this perspective, it would seem natural to overcome this constraint once technology allows the central bank to remunerate its money. However, designing a digital euro that is available offline would face additional challenges if it was remunerated.
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edit: According to an 'educated opinion' on part of a member of the Konrad Adenauer Stiftung - at least for a potential implementation the possibility to issue 'negative interest rates' on different parts of the money pool will be played down. Also there are different possible implementations concerning overcoming a concept called zero lower bound.
Basically, the notion, that if you raise negative interest it in general, people will flee into cash. The less cash is used, the lower the likelyhood of that problem occurring. The expert told the interviewer, that because of the zero lower interest bound negative interest rates as a monetary policy means would not be likely. There are some people working on scenarios to overcome it. Also there is significant 'opportunity cost' for trading digital currency into cash - so I doubt that the effect would instantly manifest itself in reality.
src: h**ps://
www.youtube.com/watch?v=08guZbfhW14 (german)
