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The ECB Could Establish a Cap for Digital Euros in Circulation

  • This was suggested by the French central banker, Francois Villeroy de Galhau, who believes that the European CBDC should be limited as a savings instrument.
  • The European issuer proposes to create a model in which the existing intermediation relationship between private banking and users is preserved.

Bank of France Governor Francois Villeroy de Galhau said on Tuesday that the European Central Bank (ECB) could set a limit on the number of digital euros it would keep in circulation to prevent damage to traditional banks.

The central bank digital currency (CBDC), which will eventually replace the use of notes and coins, is being implemented in more than a hundred countries around the world. Its purpose is to compete with stablecoins and other private cryptocurrencies.

It is expected that at the end of the year the ECB will definitively launch the digital euro, a project on which it has been working for some time due to the risk of being left behind by countries such as China, which is in the last phase of development of its CBDC (the digital yuan).

The Concerns of the European Bloc

European lawmakers and ECB authorities are also concerned about the increasing rise of stablecoins in the eurozone. That is why they ask that a regulatory framework for these digital assets be implemented as soon as possible.

The European issuer is working on building its own digital payment system at the retail and wholesale levels to avoid its future dependence on other digital currencies that could dominate US markets and technology companies.

At the same time, concerns have been raised among some legislators and monetary policymakers that there will be a substantial reduction in fiat deposits, and the traditional banking business will collapse.

During his speech at the Paris Europlace Financial Conference in Paris, Villeroy referred to "the possible risks of banks' deposit conversions." He stated that the monetary authorities must ensure "that a digital euro remains a means of payment rather than a saving/investment asset."

“This could be achieved by limiting the maximum amount of digital euros in circulation.”

According to the banker, in the wholesale market, the circulation of digital euros is less problematic, as the French central bank verified in the nine experiments carried out with public and private partners during 2021. For this year, the issuer plans to carry out another four or five tests. 

He indicated that "this work ensures that we stand ready to bring central bank money as a settlement asset as early as 2023, with the implementation of the European pilot regime."

On the Flipside

  • The ECB is aware of the risks of issuing a central bank digital currency. The possibility of people replacing traditional deposits with electronic money is one of them.
  • The other is the possible alteration of the business structure of commercial banks and their ability to provide credit to the real economy.

Why You Should Care

  • This is the reason why the ECB prefers the design of a digital euro intended to serve as an alternative means of payment and not to be used as an investment instrument.

 

It also proposes creating a two-tier money distribution model in which the existing intermediation relationship between private banks and users of the financial system is preserved.

In this way, intermediaries will continue to be in charge of incorporating European users into the new financial system, through their accounts or digital wallets in euros. At the same time, they could offer other related banking services.

This article is for information purposes only and should not be considered trading or investment advice. Nothing herein shall be construed to be financial legal or tax advice. Trading Forex, cryptocurrencies, and CFDs poses a considerable risk of loss

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