European Central Bank executive board member Fabio Panetta provided an overview of the central bank’s current research on a retail central bank digital currency Friday when he spoke at the IESE Business School Banking Initiative Conference on Technology and Finance. Panetta said the issuance of central bank digital currencies, or CBDCs, is “likely to become a necessity,” but warned that “they should not become a source of financial disruption that could impair the transmission of monetary policy in the euro area.”

A key to maintaining financial stability during the introduction of digital currency, Panetta said, would be to give commercial banks a role in the process. This would allow the banks to continue providing front-end services as the central bank benefitted from their experience in customer onboarding and Anti-Money Laundering.

A discussion paper issued by the United States Federal Reserve in January foresaw a similar role for banks. The paper noted the potential role of financial intermediaries in preserving consumer privacy. The European Central Bank, or ECB, has also addressed privacy issues.

In addition, Panetta said, “As the demand for cash weakens, issuing CBDCs could ensure that sovereign money continues to play its role in underpinning confidence in money and payments,” while fostering competition among banks “by reducing banks’ market power and improving contractual terms for customers.”

Research on the complex potential interactions between CBDCs and monetary policy illustrate the importance of careful CBDC design, Panetta noted. “We need to solve the ‘CBDC trilemma’ according to which central banks’ objectives of payment efficiency, financial stability and price stability cannot all be achieved together,” he said.

The task of designing a digital currency is complicated by the rapidly evolution of other forms of digital assets “whose emergence alongside fiat money in the past ten years has been sudden and had a massive effect – similar to the Cambrian explosion of 20 to 25 million years ago.” Nonetheless, the lack of an adequate CBDC to balance the influence of other digital assets would create “risks for monetary sovereignty, the lender of last resort functions of central banks and financial stability,” Panetta concluded.