Back to the stable

Speech by Yves Mersch, Member of the Executive Board of the ECB, at the Zahlungsverkehrssymposium, Deutsche Bundesbank, Frankfurt am Main, 29 May 2019

The main objective of the ECB is to ensure price stability. It is also the best contribution we can make to achieving sustainable growth.^[1] Since the launch of the euro, the ECB has honored this commitment and has achieved price stability by maintaining an average inflation rate below, but close to, 2%. This is why the majority of euro area citizens have confidence in the euro.^[2]

Their confidence is subordinated to the independence of the central bank. Independence is given to central banks to prevent politicians from seeking electoral gains through measures that stimulate economic activity in the short term, but detract from the long-term health of the economy. economy and country. It is also recognized that the legal tender must be issued by a public authority. In the case of the EU, it is up to the ECB to issue the euro and decide on the denomination of the notes.

We could not accept a situation in which, for anti-European or populist reasons, the use of certain euro denominations is not allowed in some parts of the EU.

This established consensus is challenged by private initiatives triggered by technical innovations. We are seeing more and more solutions in search of a problem.

Bitcoins and other cryptographic badets claim to require neither the trust nor the support of a sovereign. They reject the paradigm of state-supported currencies governed by central banks, as well as the role of financial institutions as trusted intermediaries. These self-proclaimed currencies, more accurately described as cryptographic badets, have proved unusable, demonstrating that well-executed central bank policies remain the only solid foundation for stability.

The without trust is useless

Bitcoin's original vision replaces trust in a dedicated intermediary with cryptographic evidence. In other words, two parties can trade directly as peers without using a trusted third party. Their transactions are based on Distributed Ledger Technology (DLT), sometimes referred to as a "trusted engine" for cryptographic badets.

By exploiting cryptography and mechanisms to achieve peer consensus in a distributed system, DLT guarantees the integrity and security of records that would be placed in a centralized system by a responsible third party. Crypto-badet users can therefore rely on the underlying block strings to avoid double expense and validate the property.

However, trust is not entirely useless. In fact, users trust the opacity of the arrangements by which the influence is dispersed in the blockchain. Public blockchains still depend on key actors to perform certain tasks, but these actors are often unidentified and not accountable. A protocol must be created, maintained, and exploited, while the transactions that it supports must be validated. Developers and miners perform actions that affect the output of public block strings. In addition, the practical usability of cryptographic badets relies largely on identifiable intermediaries to act as "bridges" between the cryptographic badet ecosystem, on the one hand, and the financial markets and the economy, on the other.

I've already said that it was necessary to differentiate "badets" such as Bitcoin from the technologies that underpin them, such as blockchain. Indeed, some technologies deserve to be explored and could also be of interest to central banks. That said, our role is not to promote the adoption of technology by industry and the general public, but to ensure that changing preferences can be securely met.

While DLT is an essential element of cryptographic badets, it is not their defining feature in itself.^[3] The unique distinguishing feature of cryptographic badets such as Bitcoin is the lack of underlying debt, which prevents them from maintaining price stability. More importantly, cryptographic badets are not protected by any sovereign authority and, unlike financial instruments, they do not confer on their holders ownership or contractual rights. Central banks provide confidence in the currency – as a store of value, unit of account and means of payment – while preserving the stability of the currency. Unlike traditional currencies, bitcoin has been very volatile over the past two years. The average volatility of Bitcoin during this period was close to 80%, while many other cryptographic badets had even higher levels of volatility. This makes it impossible to use cryptographic resources for purposes other than outright speculation.

Some crypto-badets have recently emerged that seek to minimize value fluctuations relative to a reference currency, but they do not constitute an alternative to the euro. These "stable coins" generally fall into two categories: those that are protected by an underlying badet and those that rely on an algorithm to constantly match the supply and demand of units in circulation. Unsurprisingly, stable coins with the least amount of volatility are those that guarantee each unit issued with an equal amount of currency. Why use a proxy, then, if you can have the real thing – unless the issuers of this proxy are trying to interfere with the control of the secure badets in circulation in the economy

The poor performance of cryptographic badets is not an excuse for complacency, but rather a reminder of the importance of the central bank's goal of maintaining price stability. Achieving this objective is subject to the independence of the central bank, in accordance with a narrow but clearly defined mandate. Central banks should not be overburdened for multiple purposes without the appropriate instruments to achieve them. This brings me to the role of the ECB in monitoring market infrastructures.

Less is more

The ECB's task is to promote the smooth functioning of payment systems, in line with the Treaty, where it has a keen interest in the regulatory framework for market infrastructures that clear and settle securities and derivatives. in euros, in particular central counterparties. . This reflects the systemic impact that CCPs may have in extreme stress situations, by disrupting pension markets or by channeling liquidity pressures to banks – which are also counterparts to monetary policy – affecting thus the circulation of liquidity in payment systems. In the end, CCPs might have to resort to central banks as lenders of last resort. Central banks therefore have an important role to play in the regulation of central clearing – a widely recognized but often misunderstood concept.

In this context, let me say a few words about recent developments in the area of ​​CCP regulation, and in particular the results of the legislative process for the revision of the CCP supervisory framework, European Market Infrastructure (EMIR II), and the recommendation to amend Article 22 of the Statute of the ESCB and the ECB. The ECB has recommended that EU legislators amend its statutes to clarify that the ECB has legal jurisdiction over central counterparties, which would have allowed it to fulfill its EMIR II monetary policy role. . We argued that the ECB needed an explicit general jurisdiction to monitor and manage the risks badociated with our mandate, including broad discretion to take the necessary actions in exceptional situations where the stability of the euro is at stake.

We have also repeatedly warned against the positions taken by some Member States – especially those who have traditionally upheld the independence of monetary policy – and which have finally been reflected in the draft amended text of the European Economic and Monetary Policy. Article 22 considered by EU legislators. According to this approach, the ECB would have no jurisdiction over EU CCPs, in contrast to its central bank mandate for the euro, which calls for powers over all operations clearing the euro, regardless of its location. The ECB would have received an exhaustive list of specific and circumscribed powers – reproducing the current and future provisions of EMIR II – with respect to certain systemic central counterparties from third countries, designated by the European Securities and Markets Authority ( ESMA). This would have been unusual and too granular for the statute of the ESCB, which is a primary right and gives the ECB wide discretion in the exercise of its monetary mandate, and that would have undermined the functional independence of the ECB. Added to this was the requirement that the ECB's measures be 'aligned' with the legislative acts and measures taken under those acts. Given these serious legal concerns, the Governing Council concluded that the final text seriously distorted its recommendation and undermined the fundamental principles of the Treaty, including the ECB's independent exercise of its monetary policy.

The recommendation to amend the Statute has therefore been withdrawn, which is regrettable. The Governing Council has, however, made it clear that the ECB continues to support the EMIR II objectives and is committed to contributing to its implementation in legally possible cases and in accordance with its mandate. The ECB is counting on a fruitful cooperation with ESMA and other authorities to move this matter forward. ^[4]

In these times of upheaval in global payments markets, it is all the more important that Europe is closing its ranks. In the United States, we have already witnessed two mergers of two major payment service providers this year. The two mega-mergers had a market value of $ 55 billion and could result more. In such dynamic markets, in which economies of scale play a central role, we should not lose ourselves in the national details, but confidently improve the conditions of the single European market and the competitiveness of its participants, without however offer protectionist solutions. barriers.

conclusions

Let me conclude.

As central banks, we must remain true to our core mandate. Through change or crisis, we must retain the ability to adapt to changing needs and do what needs to be done. But this should not be at the expense of independence or accountability.

In the end, we will be judged on how we ensure price stability. Trust is the most valuable badet of the central bank.^[5]