A paper from the European Central Bank (ECB) has emphasised that tiered interest rates could have a positive impact on controlling digital currency volumes.
The paper, which was published at the start of the year, not only underlines the potential risks of central bank digital currencies (CBDC), but also some of the economic and financial benefits of them, mapping out regulations that could be implemented in a bid to limit the risks.
Assuming that there’s a discontinuation or at least strong reduction in the prevalence of banknotes, the paper highlights that the growth of CBDC will lead to greater of illicit payment and saving activities, money laundering, and terrorist financing.
It adds that CBDC can help enhance ‘the financial stability and reduce moral hazard of banks’ as it lightens the role of the banking system in money, as the significance of CBDC heightens.
The paper is bylined by the ECB’s director general of market infrastructure and payment Ulrich Bindseil, who detail: “CBDC offers a number of advantages with regards to the convenience, efficiency, stability andaccessibility of retail payment.
“While electronic payments with all their efficiency gains have been possible for some decades on the basis of commercial bank money, offering electronic payments directly in central bank money could have additional advantages.”
On the loosening role of banknotes within the payments sector, the paper adds: “If households substitute banknotes with CBDC, then central bank and commercial bank balance sheets do not really change.
“However, if households substitute commercial bank deposits with CBDC, then this would imply a funding loss for commercial banks and could lead to ‘disintermediation’ of the banking sector.”