An economist group examining the possible effects of a new digital currency has argued that access restrictions to this currency are necessary in order to protect the existing financial system. Their study follows an earlier proposal to limit digital euro deposits at the European Central Bank (ECB) to €3,000 per person.
Digital Euro’s limited availability is expected to prevent it from becoming too popular
Europeans’ access to a digital euro should be restricted to prevent a flight of capital from deposits at commercial banks, according to a report published by the European Central Bank. The paper has been produced by a team of experts led by Frank Smets who heads the regulator’s Directorate General Economics.
The economists have tried to predict the impact of a central bank digital currency (CBDC) on Europe’s banking sector. In the absence of empirical data, they have taken into account public reactions to news about ECB’s plans to issue a digital version of the common European currency.
As part of their study, which was published by the monetary authority on Thursday, the authors conclude that the optimal amount of digital euros in circulation should be between 15% and 45% of the eurozone’s quarterly real gross domestic product (real GDP), its economy’s inflation-adjusted output.
The calculation comes after a previous suggestion that central bank digital currency accounts should be capped at €3,000 per person ($3,070 at current exchange rates). Fabio Panetta, ECB Board member, suggested that this limit be set at 34% to make sure there’s enough fiat money for lending.
The amount of electronic currency that is in circulation if the European CBDC was to be released without restricting its quantity would likely be much higher, possibly reaching 65% of quarterly real GDP within the Euro area. That would lead, the researchers say, to more sizable effects on banks’ valuations and lending.
The ECB economists partially based their analysis upon public statements from European officials concerning the design of digital euro. In June, Panetta said that maintaining the total digital euro holdings between €1 and €1.5 trillion would help avoid potential negative effects on Europe’s financial system and monetary policy.
This total would also be comparable to the existing banknotes that are in circulation. This would permit holdings between 3,000 to 4,000 digital euros per capita, based on the current population of eurozone countries at approximately 340 million.
In mid-July, the ECB official and the bank’s President Christine Lagarde remarked in an article that the investigation phase of the CBDC project will take at least another year, but also marked some key principles in its realization that they consider already clear.
The bankers stated that the users will appreciate the ease-of-use, wide acceptance, low transaction costs, speedy transactions, security and consumer protection. They also promised the digital euro would be more effective than crypto.
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