Consequences of the international adoption of central bank digital currencies (CBDCs)

Speech by Fabio Panetta, Member of the Executive Board of the ECB, focused on the international dimension of central bank digital currencies (CBDCs), particularly whether it would be possible to use the digital euro in cross-border contexts, and under which conditions. According to him, the international dimension of CBDCs is almost unexplored in terms of research. This angle is very relevant as “the issuance and design of CBDCs require a careful assessment of the trade-offs between risks and opportunities” and “design choices are best made when the implications are properly understood”.

There are some consequences of issuing a CBDCs available to non-residents, that are already identified by the academic literature. The final design of the CBDCs, as for example the introduction of restrictions on remuneration and quantities (caps), has a considerable influence on the extent of these consequences:

• Risk of “digital dollarization”. If a CBDC is used outside its jurisdiction and it is widely adopted, this might lead to the domestic currency losing its function as a medium of exchange, unit of account and store of value, raising financial stability risks. Particularly exposed to these situations are those less developed economies with unstable currencies. However, this risk may vary significantly across countries and currencies.
  
  
• Risk of international spillovers. Issuing CBDCs available to non-residents can magnify the cross-border transmission of shocks, increasing exchange rate volatility and alter capital flow dynamics, as CDBCs characteristics (a safe and liquid instrument with a potential remuneration…) make them appealing to investors as an alternative financial instrument. This may put economies and central banks that don’t issue a CBDC with a higher exposure to those risks and potential stronger market pressures.
  
  
• Impact on the international role of currencies. Lowering the costs of cross border payments, while increasing the usage of a specific CBDC as a global payment unit, could also cause an exchange rate appreciation.

However, the author encourages economic researchers to continue investigating about CBDCs compared to alternative monetary and financial instruments, launching several open questions to have a better understanding and to calibrate adequately the model and design features of the CBDCs. Among these open questions you can find the following: 

• What will be the potential demand for CBDCs, which is crucial to understanding their financial stability implications?
• To what extent would CBDCs still have the potential to affect the configuration of global reserve currencies and the stability of the international monetary system?
• What impact might a CBDC have on the effectiveness of capital account management measures?
• How much global cooperation is optimal? How could a jurisdiction with more stringent requirements on the traceability of payments allow cross-currency transactions with a jurisdiction granting higher privacy standards?