Testing the waters of the Rubicon: the European Central Bank and central bank digital currencies
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ORIGINAL ARTICLE
Testing the waters of the Rubicon: the European Central Bank and central bank digital currencies Hossein Nabilou1,2
© Springer Nature Limited 2019
Abstract Breakthroughs in financial technology (fintech), ranging from early coins and banknotes to card payments, e-money, mobile payments, and, more recently, cryptocurrencies, portend transformative changes to the financial and monetary systems. Bitcoin and cryptocurrencies bear a significant resemblance to base money or central bank money. This functional similarity can potentially pose several challenges to central banks in various dimensions. It may pose risks to central banks’ monopoly over issuing base money, price stability, the smooth operation of payment systems, the conduct of monetary policy, and to the stability of credit institutions and the financial system. From among several potential policy responses, central banks have been investigating and experimenting with issuing central bank digital currency (CBDC). This paper investigates CBDC from a legal perspective and sheds light on the legal challenges of introducing CBDC in the euro area. Having studied the potential impact of issuing CBDC by the European Central Bank (ECB), particularly on the banking and financial stability, the efficient allocation of resources (i.e. credit), as well as on the conduct of monetary policy, the paper concludes that issuing CBDC by the ECB would face a set of legal challenges that need to be resolved before its issuance at the eurozone level. Resolving such legal challenges may prove to be an arduous task as it may ultimately need amendments to the Treaty on the Functioning of the European Union. Keywords Central bank digital currency · Central bank · European Central Bank · Cryptocurrency · Bitcoin · Money JEL Classification E42 · E51 · E58 · G01 · G23 · G28 · K22 · K23 · K24
Introduction The history of money has been a battlefield between governments and the private sector.1 Historical examples of government reactions to privately issued money—eventually culminating in banning or otherwise controlling private money by governments2—underline the importance of money as a coordination device for facilitating transactions in human societies by taking up the role of a unit for the uniform measurement of value across several goods and services. In modern times, when governments appeared to have conclusively
* Hossein Nabilou [email protected] 1
University of Luxembourg, Luxembourg, Luxembourg
Amsterdam Centre for Law and Economics (ACLE), University College London Center for Blockchain Technologies (UCL CBT), London, UK
2
won the battle over the creation of base money,3 the rise of cryptocurrencies has proved that the war is still ongoing. Similar to the majority of financial innovations, which aim to reduce the frictions in the financial system, cryptocurrencies have emerged to address the existing market frictions stemming from the lack of a global uncensorable peer-topeer (P2P) digital store of value and payment mechanism. 1
It seem
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