Bank of Spain, which has recently published a report on the use of digital forms of money in the banking system has come to the decision that digital currency issued by a central bank could have "important" effects on the transmission of monetary policy. However, Galo Nuño, the Director General of the Economy at Banco de España, also warns about cryptocurrency uncertainty and the associated risks.
Inspired by “the decline in the use of cash in some countries due to the increasing popularisation of private digital payment means (cards, mobile payments, etc.), together with technological innovations and development of the so-called "cryptocurrencies" (Bitcoin, Ethereum, etc.)”, the author of the paper decided to run a research on whether the Central Bank “should adapt to this growing demand for digital payment services and issue their own digital money".
According to the author, there are three main reasons why central banks would consider the possibility of launching a cryptocurrency:
1. Banks are already noticing the lower demand for cash in some jurisdictions,
2. The possible improvement of some aspects of the functioning of payment systems.
3. Potential improvements in the transmission of monetary policy.
The main risk associated with the launch of a Central Bank Digital Currency (CBDC) is technological.
If this were to be created, with a non-anonymous character, and based on a technology similar to that of the existing electronic means of payment, it would imply significant costs in terms of infrastructure, operational and regulatory requirements. If, on the contrary, the creation of an anonymous CBDC occurs, it would be necessary to adopt the technology on which the cryptocurrencies are based on a quite different scenario.
A failure in either of the two scenarios could be detrimental to the economy as a whole. According to Galo, the first reason why a central bank would consider launching a CBDC could be the impact that a possible substitution of cash by digital means of payment could have on the benefits received by central banks for issuing currencies.
Second, according to some studies, the launch of a central bank digital currency could improve certain aspects related to the functioning of payment systems. However, it has not been demonstrated why these improvements should come from a public digital currency launched by a central bank and why they could not be obtained through existing private digital currencies.
Third, it finds the possible improvement in the transmission of monetary policy. If the CBDC is remunerated, its interest rate would become a key instrument for the implementation of conventional monetary policy, since this would affect the savings and investment decisions of families and companies. This would make it possible to de-link, at least in part, the transmission of monetary policy from the banks' financial situation, which in turn could be especially important during financial crises.