The European Central Bank (ECB) plans to limit its holdings of digital euros in light of financial stability concerns, according to board member Fabio Panetta. He clarified that the plan is to limit the amount of digital cash in circulation, similar to current euro bills.
Eurozone central banks will keep their total holdings of digital euros below 1.5 trillion
ECB Board Member Fabio Panetta warned in a statement to the European Parliament’s Economic and Monetary Affairs Committee (ECON) that the digital euro could result in the conversion of a large portion of eurozone bank deposits into digital cash.
deposits are the main source of funding for eurozone banks, Panetta noted, stressing that the authorities are closely watching the financial and monetary risks associated with the introduction of a central bank digital currency (CBDC). He explained.
If not well designed, the digital euro could lead to an over-substitution of these deposits. Banks can respond to these outflows and manage the trade-off between funding costs and liquidity risk.
Fabio Panetta believes it is possible to prevent digital euros, which are still under development, from being used as a form of investment rather than a means of payment; he noted that one of the tools the ECB intends to employ is to impose quantitative limits on the amount individuals can hold.
According to the regulator’s preliminary analysis, keeping the total amount of digital euro holdings in the range of 1 to 1.5 trillion would help avoid potential adverse effects on the European financial system and monetary policy. The banker elaborated.
This amount is comparable to the current holdings of banknotes in circulation. The population of the Eurozone is currently about 340 million, so each person could hold about 3,000 to 4,000 digital euros.
The ECB will curb its large investments in digital currencies
. In parallel, Panetta added, the ECB could also take steps to discourage investment in digital cash by “discouraging remuneration above a certain threshold and applying interest rates that are not attractive for large holdings.” No decision has yet been made as to how these two measures would be combined.
To achieve its objective in this regard, Panetta indicated that the monetary authority will seek to adopt CBDC in stages, predicting that it will likely take several years before the majority of Europeans hold digital euros.
He also said that the ECB will aim for simplicity in terms of technical implementation and user experience when developing digital euro tools. The Board member stated, “We want to provide people with a product that is easy to understand and easy to use. Ensuring privacy and contributing to financial inclusion are also goals.
Fabio Panetta also argued that the European Central Bank “needs to offer its own digital currency to avoid confusion about what digital money is.” He reiterated his earlier criticism of cryptocurrencies, which, in his view, cannot perform this function, and called for filling the remaining regulatory gaps in the crypto ecosystem.
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