Banking News

ECB research confirms impact of CBDC on foreign economies

european central bank ecb

Earlier this month, researchers at the European Central Bank (ECB) published a report on Central Bank Digital Currency (CBDC) and the potential impact on foreign economies. It found that CBDC increases the international ramifications of monetary shocks, but the CBDC design can help to address the issues.

It modeled various scenarios with two open economies in which there were financial shocks, both with and without CBDCs. In the absence of a CBDC, there’s often a movement of assets into foreign currency bonds when there are shocks to an economy. In a scenario where there are also CBDCs, the switch is more likely to be into a foreign currency CBDC than bonds.

This shift can be reduced by restricting access to the CBDC by foreigners or controlling the digital currency’s interest rate.

The researchers also explored everyday monetary policy in the absence of shocks. It found that issuing a domestic CBDC will impact the autonomy of the foreign country’s monetary policy. And it’s argued this can result in a first-mover advantage.

Three weeks ago, at the EU Blockchain Observatory and Forum, Scott Hendry from the Bank of Canada highlighted these concerns. They were also previously raised in Canada’s paper on CBDC. Talking about the threat to monetary sovereignty, Hendry said, “I typically view this as a low probability but catastrophic event.” 

He continued, “If there’s a U.S. dollar CBDC or a U.S. dollar Libra, the implications for Canada are basically the same. It would potentially lead to the dollarization of the Canadian economy.”

Two months ago, the ECB published its broader paper on CBDC and plans to make a decision on whether to issue a digital euro by mid-2021. It has also opened a public consultation on the topic.

Meanwhile, central banks worldwide have increased their focus on CBDCs as a result of Facebook unveiling its Libra plans and the first-mover advantage that China has with its advanced pilots for the digital yuan or eCNY.