Holdings limit will prove central to the digital euro´s future

The Digital Euro, a complement, not a substitute for cash, neither an investment or savings instrument

The European Central Bank is considering issuing a digital euro, with a decision on the next steps to be taken in October 2023. Around the world, electronic money is evolving rapidly: more than 100 central banks are considering creating digital currencies (CBDCs) and some, such as China, are already using them. According to the article, whether or not the European Union needs a digital euro, many policy-makers seem to have decided that they want one.

Main findings of the article:

  • Limits on Digital euro holdings: A limit of €3,000 is on the table, which would set the digital euro up as a cash alternative but not a place to keep substantial liquid assets. The ECB has proposed a monthly limit of 1,000 transactions, possibly with a maximum value of 50 euros each. Taking this limit into account, some estimates suggest that the amount of deposits that could be transferred from traditional bank deposits to digital euros could be around 1 trillion euros, equivalent to 10% of total bank deposits on demand.

  • Pressure to increase the limit: The recent turmoil in the financial sector, coupled with the lack of genuine joint deposit insurance in the euro area, may put pressure on the ECB to consider raising the allowed amounts. However according to the article these higher limits could weaken the banking system overnight if customers immediately fill their full allowance.

  • Final design still under discussion and will be built around three main levers: (a) functionalities to reduce excessive usage b) a distribution model that encourages intermediation, (c) the ability to target liquidity conditions according to need. Consumers would access the digital euro through banks and authorized providers, with no fees for basic use. In contrast, the costs would be borne by merchants and payment service providers. In conclusion, the main objective should be to make electronic payments available to all euro area residents, regardless of the country in which they live, work or travel.

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