Amid financial stability concerns, the European Central Bank (ECB) is planning to limit digital euro holdings, according to board member Fabio Panetta. The plan is to have a maximum amount of digital cash in circulation similar to that of today’s euro banknotes, the official announced.

The central bank of the euro zone wants to keep the total digital euro stock below 1.5 trillion

A digital euro could potentially result in a large part of bank deposits in the euro area being converted into digital cash, ECB Executive Board member Fabio Panetta warned in a statement to the European Parliament’s Committee on Economic and Monetary Affairs (ECON).

Deposits are the main source of funding for banks in the euro area, Panetta stressed, noting that the agency is closely examining the financial and monetary risks associated with the launch of a central bank digital currency (CBDC). He explained:

If not well designed, a digital euro could result in an excessive amount of these deposits being replaced. Banks can respond to these outflows and manage the trade-off between funding costs and liquidity risk.

Fabio Panetta believes it is possible to use the digital euro, which is still under development, not as a means of payment but as a form of investment. One of the tools the ECB intends to use is the imposition of quantitative limits on individual holdings, he noted.

According to the regulator’s preliminary analysis, keeping the total stock of digital euro holdings in the range of 1 to 1.5 trillion would help avoid potential negative impacts on the European financial system and monetary policy. The banker stated:

This amount would be comparable to the current banknotes in circulation. Since the euro zone currently has around 340 million inhabitants, this would allow for a stock of around 3,000 to 4,000 digital euros per capita.

ECB advises against large investments in its digital currency

In parallel, the ECB can also take steps to discourage investments in digital cash by applying “discouraging rewards above a certain threshold, with larger holdings subject to less attractive interest rates,” Panetta added. The bank has yet to decide how the two measures will be combined.

To achieve its goals in this regard, the Monetary Authority will seek a phased adoption of the CBDC, Panetta said, predicting that it would likely be several years before a majority of Europeans would own the digital euro.

The official also noted that when developing tools for the digital euro, the ECB will aim for simplicity in terms of technical implementation and user experience. “We want to provide people with a product that is easy to understand and easy to use,” said the board member. Ensuring privacy and contributing to financial inclusion are also among the goals.

Fabio Panetta also insisted that the European Central Bank must provide its own digital currency to “avoid confusion about what digital money is.” He reiterated previous criticism of cryptocurrencies, which he believes cannot fulfill this function, and called for remaining regulatory gaps in the crypto ecosystem to be closed.

tags in this story

Banknotes, Board Member, CBDC, Central Bank, Circulation, Crypto, Cryptocurrencies, Cryptocurrency, Digital Cash, Digital Currency, Digital Euro, ECB, Euro, Eurozone, Fabio Panetta, Financial Stability, Equity, Monetary Policy, Panetta

What do you think of the ECB’s intentions to shape the digital euro? Let us know in the comment section below.

Lubomir Tasev

Lubomir Tassev is a journalist from tech-savvy Eastern Europe who likes Hitchen’s quote: “Being a writer is what I am, not what I do.” Along with crypto, blockchain and fintech, international politics and business are two other sources of inspiration.

photo credit: Shutterstock, Pixabay, Wiki Commons, Alexandros Michailidis

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