With concerns about financial stability in mind, the European Central Bank (ECB) plans to limit its digital euro holdings, according to Governing Council member Fabio Panetta. The official unveiled the plan aimed at getting a maximum amount of digital cash in circulation similar to today’s euro banknotes.
Eurozone central bank keeps total euro digital holdings below 1.5 trillion
In a statement to the European Parliament’s Committee on Economic and Monetary Affairs (ECON), a member of the Executive Council of the European Central Bank, Fabio Panetta, warned that a digital euro is likely to convert a significant portion of bank deposits in the eurozone into digital cash.
Panetta noted that deposits are the main source of financing for eurozone banks, stressing that the authority is closely looking into the financial and monetary risks associated with introducing a central bank digital currency (CBDC). It is to explain:
If the digital euro is not well designed, it may replace an excessive amount of these deposits. Banks can respond to these outflows, managing the trade-off between funding cost and liquidity risk.
Fabio Panetta believes that it is possible to prevent the use of the digital euro, which is still under development, as a form of investment rather than as a means of payment. He noted that one of the tools the European Central Bank intends to use is to impose quantitative limits on individual holdings.
According to the regulator’s preliminary analyzes, maintaining the total digital assets of the euro in the range of 1 to 1.5 trillion dollars would help to avoid the possible negative effects of the financial system and monetary policy in Europe. The banker explained:
This amount will be comparable with the current holdings of banknotes in circulation. Since the eurozone population is currently around 340 million, this would allow holdings of about 3,000 to 4,000 digital euros per capita.
European Central Bank discourages big investments in its digital currency
In parallel, the ECB may also take steps to discourage investments in digital cash by implementing “reward discouragement above a certain threshold, with larger holdings subject to less attractive rates,” Panetta added. The bank has not yet decided how to combine the two measures.
To achieve its goals in this regard, the monetary authority will seek the gradual adoption of the CBD, Panetta noted, predicting that it will take several years before the majority of Europeans hold the digital euro.
The official also noted that the ECB will aim for simplicity, in terms of technical implementation and user experience, when developing tools for the digital euro. “We want to provide people with a product that is easy to understand and use,” said the board member. Also among the goals are ensuring privacy and contributing to financial inclusion.
Fabio Panetta also insisted that the European Central Bank needs to provide its own digital currency “to avoid confusion about what digital money is.” He reiterated previous criticisms of cryptocurrencies that, in his view, cannot perform this function and called for any remaining regulatory loopholes to be filled in the crypto ecosystem.
What do you think of the ECB’s intentions regarding the design of the digital euro? Let us know in the comments section below.
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