Interview with Yves Mersch, Member of the Executive Board of the ECB, conducted by Piotr Skolimowski and Carolynn Look on 6 February 2018

February 08, 2018

"The General Manager of the BIS is usually also reflecting the views that are expressed around the table when central bankers come together. You won't be surprised to know that we at the ECB are fully in line with his views and we have similar worries, or similar endeavours we are working on.
The question is not so much that these virtual currencies (VCs) are already at a level that would cause huge disruption in the real economy, but we are currently more concerned about the social and psychological effect they seem to have. In this respect money has to do with confidence and that's why we, central bankers, feel that we have a certain role to play to preserve confidence of the public in our legal tender. There is so much money flowing in that it's like a gold rush - but there is no gold.

What specific role can the ECB as a banking supervisor play in reining in digital currencies?
It's important to stress that we are a supervisor and not regulator. But supervisors can also impose certain requirements in terms of risk mitigation and prudent behaviour. But by and large, many banks out of their own initiative have already taken clear positions that they will not venture into this gold rush. But that being said, it's not only the question of the bank supervisor. Also from the monetary policy perspective, the central bank has a mandate to promote sound and efficient payment systems. From that point of view, it remains appropriate that we keep a clear distinction between virtual private initiatives, not backed by anyone, and trusted public currencies that are legal tender and backed by whole economies.

 Are you coordinating your efforts with other authorities?
We are obviously in a constant dialogue with other authorities, whose mandate is to maintain the integrity of the markets, protection of investors and of consumers. Therefore we should have a deeper reflection on where the action is needed. There is an area of investor protection, then there is oversight of the financial market infrastructure. If you increasingly have bridges between the virtual world and the real world and then there is a collapse in this virtual world, it could drain liquidity from the real world. This then becomes a concern for the central bank.
Take the example of CCPs: if one were to offer future contracts on such VCs these would then have to be cleared. But CCPs have a single fund of default and if that fund were not sufficient then that would engage the responsibility of other clearers. That would mutualize risks that are emanating from those virtual currencies. The question then arises whether we shouldn't have a clearer segregation between the real and the virtual world. The same goes for the imported credit risk that could come along and the question of collateral. These are the areas where we have direct responsibility as a central bank…"

What tools do you have to keep this virtual world at bay and do they need reinforcement?
"…Our existing frameworks for monetary policy clearly don’t accept these assets as collateral and we will also not accept them to enter our existing platforms like Target-2 - these rules are already in place. The question is: should we go beyond?…"

"…Would you be ready to abandon your TIPS initiative in favor of a blockchain/DLT based solution? The conclusion to your Stella project with BOJ says "DLT-based solution could meet the performance needs of current large value payment systems"?
TIPS is 10 seconds, 0.2 cents. DLT transactions are at best 30 euros and take at least one hour. Why would we abandon TIPS? We have a mandate for efficient payment systems, and we go for efficiency. We are not bound to a technology, we are bound to results, and I think it’s the result that counts
As to the technology of DLT, we are testing it but there are so many unsolved questions in terms of governance and legal certainty in DLT. We are looking to what extent we could overcome these legal barriers, but we are at a very early stage…"

European Central Bank

This article was originally published in The ECB.

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