ECB must do more to promote the digital euro’s wholesale benefits
Although the central bank is pushing forward with its plans and has clarified the benefits for capital markets, it remains unclear if there is widespread support for a digital bond market
Central bank digital currencies (CBDCs) are progressing quickly. At time of writing, according to the IMF, 114 separate counties are working on ways to introduce the technology, and 10 of those have already implemented it.
Of course, most of these currencies are relatively tiny. Think the Bahamian sand dollar, the digital version of the country’s dollar, which was the first example of a country introducing a finished product. Yet the Bahamian dollar is not a currency with any great significance beyond the turquoise seas of the Caribbean. In fact, the only country boasting a functioning CBDC that has a systemically important currency on a global scale is China — and the digital yuan is yet to meet expectations and remains relatively underused.
This week, IMF managing director Kristalina Georgieva told a conference in Morocco that the fund is developing a platform for CBDCs that would look to provide interoperability between fragmented currencies. A common framework would be a big step in the quest to legitimise the technology on a global scale.
Central banks controlling the four dominant global currencies are also discussing the concept. Although each are at different stages of the process, they have all promised to introduce some form of digital currency in the near to medium term. Japan launched a CBDC pilot in April, the UK’s ‘Britcoin’ is likely to arrive in the next couple of years, and the Fed — while slightly behind — has openly discussed its plans to follow suit.
In Europe, however, the ECB is in advanced discussions for a digital euro, a project that will introduce a retail level digital currency that can be used by everyone and a wholesale version that can be used at the institutional level.
Unlike most countrys to have issued CBDCs so far, the ECB has a very healthy and functioning bond market to take into account. Happily, the central bank claims to have a clear use case for CBDCs in the capital markets: primarily for the issuance of debt using smart ledger technology at the public or corporate level.
European debt issuers using the wholesale central bank digital currency to issue fully digital bonds will benefit in five ways, according to a blog post by Josselin Hebert, senior digital innovation officer, and Kalin Anev Janse, chief financial officer, of the European Stability Mechanism. These are: expedited execution; increased transparency; reinforced financial stability; actual scalability; and cost savings for all parties.
A digital euro, they wrote, would provide a “safe and reliable settlement instrument to ensure that payment is made in a timely and secure manner”, and provide “value to the end-to-end debt issuance process”. By reducing costs and increasing efficiency, a truly digital bond could be a major step in upgrading the European, and therefore global, bond markets.
A separate ESM-led paper from March highlighted another potential gain the technology could bring. Using a sovereign debt issuance as an example, the paper suggested that a “a wholesale central bank digital currency on a private permissioned blockchain could overcome existing risks and impediments and lead to significant efficiency gains in the financial system across debt capital markets”.
Increasing operational efficiency, cost saving, and speed of execution are all matters that those in the debt markets complain about on a regular basis, and offer significant rewards that any self-respecting bond issuer should strive towards.
But despite these clear benefits, most people don’t really seem to get what a digital currency is for — or, indeed, understand how it could help them.
Nonetheless, market sentiment seems to be against the digital euro. In discussions with numerous capital markets players over the last few months, GlobalCapital has made several observations: first, there is far from a consensus on what a digital euro would actually be used for; second, there is a stark lack of distinction between retail and institutional level implementation; and third, it is unclear if anybody really wants a truly digital bond market.
At the Global Borrowers event this week in London, for example, GlobalCapital journalists expressed doubt that delegates really want digitised bonds, with market participants making noises around potential privacy violations, or showing a typical reluctance to go first and risk losing face with a bad outcome. Chatter at ICMA’s flagship event last month in Paris event was of a similar vein. “What is it even for?” they asked.
That is not to say that those in the know are unclear or lack direction — far from it. The ECB, with a little help from the ESM, has done a good job — to those that want to listen — of explaining why a digital euro would be a good thing for the European bond markets. What they haven’t done especially well is to sell that idea to the rest of the market.
If the central bank wants buy-in from issuers, and any sort of excitement at the prospect of a digital bond and the benefits it could bring, it must do a better job at marketing what exactly the product is and what benefits it brings. Because, in a world of reluctance and general fear of technology, a digital bond market certainly isn’t going to market itself.