ECB suggests limiting access to digital euro to protect banks

A group of economists assessing the potential effects of a digital euro has insisted that access to the future currency must be limited to preserve the current financial system. Their study follows an earlier proposal to limit digital euro deposits at the European Central Bank (ECB) to €3,000 per person.

Limited availability of digital euro should prevent it from becoming too popular

Europeans’ access to the digital euro should be limited to prevent a flight of capital from deposits at commercial banks, according to a report published by the European Central Bank. The document was produced by a team of experts led by Frank Smets, who heads the regulator’s economic directorate.

Economists have attempted to predict the impact of a central bank digital currency (CBDC) on the European banking sector. In the absence of empirical data, they considered public reactions to news about the ECB’s plans to issue a digital version of the common European currency.

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In their study, which was published Thursday by the monetary authority, the authors conclude that the optimal amount of digital euros in circulation should be between 15 percent and 45 percent of the euro area’s quarterly real gross domestic product (real GDP), the inflation-adjusted output of its economy.

This calculation follows an earlier suggestion that central bank digital currency accounts should be capped at €3,000 per person. This limit, proposed by ECB board member Fabio Panetta to ensure that there is enough fiat money to support lending, is roughly in the middle of the range, at 34 percent.

If the European CBDC were to be issued without quantity limits, the amount of digital currency in circulation would be much larger, up to 65 percent of the eurozone’s quarterly real GDP. This would lead to greater effects on bank valuations and lending, according to the researchers.

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ECB economists partially based their analysis on public statements by European officials regarding the design of the digital euro. In June, Panetta said that keeping total digital euro holdings between 1 and 1.5 trillion euros would avoid potential negative effects on Europe’s financial system and monetary policy.

He also noted that this total would be comparable to current banknote holdings in circulation. With the population of the eurozone countries currently at about 340 million, this would allow for the holding of between 3,000 and 4,000 digital euros per capita.

In mid-July, ECB head and bank president Christine Lagarde noted in an article that the investigation phase of the CBDC project will take at least another year, but also marked some key principles for its realization that she considers already clear.

Wide acceptance, ease of use, low costs, high transaction speeds, security and consumer protection are the attributes that users would appreciate, the two bankers said, promising that the digital euro will be a more efficient payment tool than crypto-currencies.

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