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A digital euro has been one of the most anticipated sovereign digital currencies alongside China’s digital yuan. However, as one executive of Europe’s apex bank observes, it could lead to commercial banks disintermediation. He proposed a €3,000 threshold for users to hold, beyond which they would incur a penalty, such as negative interest rates.

Fabio Panetta, an executive board member at the European Central Bank, shared his thoughts on the digital euro during a recent online event. The Italian economist touted the CBDC as Europe’s chance to fully jump onto the digital payments bandwagon. However, the ECB must consider all the economic, financial and societal implications of such a move.

“Paradoxically, a digital euro may prove too successful. If it is not properly designed, its main strengths—safety and liquidity—could affect monetary and financial stability,” he stated in his speech.

One of the areas which he believes a digital euro would most affect is financial intermediation and capital allocation. Users could starve commercial banks of the critical deposits as they shift to depositing with the central bank. The effects would include more costly funding, lower profitability and consequently, lower lending. This would constrain the economy in the long run.

Panetta believes there’s a way to design the digital euro to overcome such a bottleneck. The first option would be to limit the amount of digital euro that users can hold with the ECB. This would allow the ECB to prevent large inflows of bank deposits into the central bank. It would also prevent investors from bringing in volatile portfolio inflows from abroad into the ECB. One way of doing this would be redirecting all incoming deposits above a user’s limit to his bank account.

“Another option would be to set a penalising remuneration on individual users’ digital euro holdings above a certain threshold. Up to that threshold, amounts held in digital euro would never be subject to negative interest rates and would thus never be treated less favourably than cash.”

He gave €3,000 as a reasonable threshold for most European citizens.

Panetta also talked about how a digital euro could impact the international monetary system. While it would provide a safe, fast and liquid mode of transaction, it would also come with its risks. These would include amplifying international economic shocks. “Indeed, recent research suggests that, in the presence of a CBDC, shocks could result in greater exchange rate fluctuations and have a stronger effect on foreign financial conditions,” he stated.

He revealed that the ECB will continue to assess all the risks a digital euro would present as it continues in its development. Citizens, banks, businesses and other stakeholders must present their views as well to ensure “that a digital euro would be optimally designed and, ultimately, serve Europeans well.”

To learn more about central bank digital currencies and some of the design decisions that need to be considered when creating and launching it, read nChain’s CBDC playbook.

See also: CoinGeek Live panel, The Future of Banking, Financial Products & Blockchain

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