Yves Mersch: Back to stable
Speech by Mr Yves Mersch, Member of the Executive Board of the European Central Bank, at
the Zahlungsverkehrssymposium, Deutsche Bundesbank, Frankfurt am Main, 29 May 2019.
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The primary objective of the ECB is to ensure price stability. This is also the best contribution we
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can make to achieving sustainable growth.
Since the launch of the euro, the ECB has delivered on this commitment and rendered price
stability a reality, maintaining an average inflation rate of below, but close to, 2%. And that is why
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the majority of euro area citizens trust the euro.
Their trust is contingent on the independence of the central bank. Independence is granted to
central banks to prevent politicians from seeking electoral gain through measures which boost
economic activity in the short term but damage the long-term health of the economy and the
country. It is also recognised that legal tender needs to be issued by a public authority. In the
case of the EU, it falls to the ECB to issue the euro and decide on the denomination of
banknotes.
We could not accept a situation in which, for anti-European or populist motives, certain euro
denominations were not allowed to be used in some parts of the EU.
This established consensus is being challenged by private initiatives triggered by technical
innovation. We are seeing ever more solutions in search of a problem.
Bitcoin and other crypto-assets claim to need neither trust nor the backing of a sovereign. They
reject the paradigm of state-supported currencies governed by central banks, along with the role
of financial institutions as trusted intermediaries. These self-proclaimed currencies, more
accurately described as crypto-assets, have proved to be unfit for purpose, demonstrating that
well-executed central bank policies are still the only sound basis for stability.
Trustless is pointless
The original bitcoin vision replaces trust in a dedicated intermediary with cryptographic proof. In
other words, any two parties can transact directly with each other as peers without requiring a
trusted third party. Their transactions rely on distributed ledger technology (DLT), sometimes
floridly referred to as the "trust engine" of crypto-assets.
By leveraging cryptography and mechanisms to reach consensus among peers in a distributed
system, DLT ensures the integrity and security of records which, in a centralised system, would
be entrusted to a responsible third party. Users of crypto-assets can therefore depend on the
underlying blockchains to avoid double spending and validate ownership.
However, trust isn't entirely dispensable. In fact, users place their trust in the opaqueness of the
arrangements through which influence is dispersed across the blockchain. Public blockchains
still rely on key players to perform certain tasks, but these players are often unidentified and
unaccountable. A protocol has to be created, maintained and operated, while the transactions it
supports need to be validated. Developers and miners perform actions that affect the outcome of
public blockchains. Furthermore, the practical usability of crypto-assets relies to a great extent
on identifiable intermediaries to act as "gateways" between the crypto-asset ecosystem on the
one hand and the financial markets and the economy on the other.
I have said before that we need to differentiate between "assets" such as bitcoin and the
technology behind them, such as blockchain. Indeed, some of the technology is worth exploring
and could also be of interest to central banks. That said, our role is not to drive technological
adoption by the industry and the general public, but to ensure that changing preferences can be
satisfied in a secure way.
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While DLT is a necessary element of crypto-assets, it is not in itself their defining feature.
The single distinguishing feature of crypto-assets such as bitcoin is the absence of an underlying
claim, which makes it difficult for them to maintain price stability. Crucially, crypto-assets aren't
backed by any sovereign authority and, unlike financial instruments, they don't give their holders
ownership or contractual rights. Central banks provide confidence in money - as a store of value,
unit of account and means of payment - by safeguarding the stability of the currency. By contrast
with traditional currencies, bitcoin has been highly volatile over the past two years. Bitcoin's
average volatility in that period was close to 80 %, while many other crypto-assets showed even
higher levels of volatility. This makes it impossible to use crypto-assets for anything but outright
speculation.
Some crypto-assets have recently emerged that strive to minimise fluctuations in value against a
currency of reference, but even they are no alternative to the euro. These so-called "stablecoins"
broadly fall into two categories: those that are backed with an underlying asset and those that rely
on an algorithm to continuously match the supply and demand of circulating units. Unsurprisingly,
the stablecoins that show the least volatility are those that back every issued unit with an equal
amount of fiat currency. Why use a proxy, then, if you can have the real thing - unless the
issuers of that proxy seek to interfere with the control of trusted assets circulating in the
economy
The poor performance of crypto-assets is not an excuse for complacency, but rather a reminder
of the importance of the central bank's objective to maintain price stability. Fulfilling this objective
is conditional on the independence of the central bank, as ensured by a narrow but clearly
defined mandate. Central banks must not be overburdened with multiple goals without having the
appropriate instruments to achieve them. This brings me to the role of the ECB in the oversight
of market infrastructures.
Less is more
The ECB has a Treaty-based task to promote the smooth operation of payment systems, as part
of which it takes a close interest in the regulatory framework for market infrastructures which
clear and settle securities and derivatives in euro, in particular central counterparties (CCPs).
This reflects the systemic impact CCPs can have in situations of extreme stress, by disrupting
repo markets or channelling liquidity strains to banks - which are also monetary policy
counterparties - thus affecting the circulation of liquidity in payment systems. Ultimately, CCPs
may need to rely on central banks as lenders of last resort. Central banks therefore have an
important role to play in the regulation of central clearing - a notion which is largely recognised
but often misunderstood.
In this context, let me say a few words about recent developments in the area of CCP regulation,
and in particular the outcome of the legislative process regarding the revision of the supervisory
framework for CCPs, the European Market Infrastructure Regulation (EMIR II), and the
recommendation to amend Article 22 of the Statute of the ESCB and the ECB. The ECB
recommended to EU legislators that its Statute be amended to clarify that the ECB had legal
competence over CCPs, which would have allowed it to perform its statutory monetary policy
role under EMIR II. We made the case that the ECB needed explicit general competence to
monitor and address risks relating to our mandate, including broad discretion to take necessary
measures in exceptional situations where the stability of the euro is at stake.
We also cautioned repeatedly against the positions taken by some Member States - particularly
those who traditionally uphold the independence of monetary policy - and ultimately reflected in
the draft amended text of Article 22 discussed by EU legislators. Under this approach, the ECB
would have had no competence over EU CCPs, contrary to its mandate as central bank of issue
for the euro, which calls for powers over all euro clearing regardless of its location. The ECB
would have been given an exhaustive list of specific and circumscribed powers - replicating the
present and future provisions of EMIR II - in respect of some systemic third-country CCPs, as
designated by the European Securities and Markets Authority (ESMA). This would have been
uncharacteristic and overly granular for the ESCB Statute, which is primary law and gives the
ECB broad discretion in the exercise of its monetary mandate, and it would have violated the
ECB's functional independence. This was compounded by a requirement that ECB measures be
"in alignment with" legislative acts and measures taken under those acts. Given these grave legal
concerns, the Governing Council concluded that the final text seriously distorted its
recommendation and interfered with fundamental principles of the Treaty, including the
independent exercise by the ECB of its monetary policy.
The recommendation to amend the Statute was therefore withdrawn, which is a matter of regret.
The Governing Council did, however, make it clear that the ECB remains supportive of the
objectives of EMIR II and is fully committed to contributing to its implementation where legally
possible and in line with its mandate. The ECB looks forward to fruitful cooperation with ESMA
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and other authorities in taking this forward.
In times of upheaval in global payment markets, it is all the more important for Europe to close
ranks. In the United States we have already seen two mergers of two significant payment service
providers this year. Both mega-mergers had a market value of $55 billion and more could follow.
In such dynamic markets, in which economies of scale play a pivotal role, we should not get lost
in national details but should self-confidently enhance the conditions of the European single
market and the competitiveness of its participants, without, however, putting up protectionist
barriers.
Conclusions
Allow me to conclude.
As central banks, we must remain true to our core mandate. Through change or crisis, we must
retain the capacity to adapt to evolving needs and do what needs to be done. But that should not
come at the expense of independence or accountability.
Ultimately, we will be judged on how we deliver price stability. Trust is the central bank's most
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valuable asset.
1
European Central Bank (2011), The monetary policy of the ECB.
2
Eurobarometer, European Commission.
3
Mersch, Y. (2018), "Virtual currencies ante portas", speech at the 39th meeting of the Governor's Club Bodrum,
Turkey, 14 May.
4
Mersch, Y. (2018), "Euro Clearing - the open race", keynote speech at the Frankfurt Finance Summit, Frankfurt,
29 May.
5
Bursian, D. and Faia, E. (2018), "Trust in the monetary authority", Journal of Monetary Economics, Vol. 98, pp.
66-79.