EU Backs Digital Euro, Demands Holding Caps to Shield Banks and Monetary Policy

Headline: EU ministers back ECB’s digital-euro push — but insist on holding caps to protect banks and monetary policy The Council of the European Union has given political backing to the European Central Bank’s plan to develop a digital euro — while making clear that strict limits on how much can be held in digital wallets will be essential. In a statement published Friday, the Council framed the central-bank digital currency (CBDC) as an “evolution of money” and a potential tool for financial inclusion, but said the ECB must cap retail holdings so the digital euro does not become a store of value that could threaten financial stability. Why the Council’s support matters The Council — which groups government ministers from the EU’s 27 member states and helps shape law alongside the European Parliament — is signaling broad national alignment with the ECB’s design choices. That political consensus increases the chance that upcoming legislation will reflect the central bank’s preferred approach to a retail CBDC. The stability argument for holding limits The core rationale for limits is to prevent large-scale migration of deposits from commercial banks to risk-free central-bank money, which could accelerate bank runs and shrink banks’ funding bases in times of stress. - Edwin Mata, co-founder and CEO of tokenization platform Bricken, told CoinDesk the caps “are about preventing the digital euro from competing directly with bank deposits.” If retail users could hold unlimited digital euros, he warned, deposits could shift quickly from commercial banks to the ECB during periods of stress. - The ECB has raised similar alarms about stablecoins such as Tether’s USDT and Circle’s USDC, saying rapid growth in such instruments could trigger retail deposit outflows and make banks’ funding more volatile. How deposit migration would ripple through the economy Experts stress the issue is not just abstract financial stability but real effects on credit and monetary policy. - Pedro Birman, CEO of Quadra Trade, explained that “most money in the euro system is created by commercial banks through lending.” If large sums moved into self-custodied digital euros, banks’ deposit bases would shrink, curtailing credit creation, raising funding costs, and acting like an unintended monetary tightening — especially during crises. - Amber Ghaddar, founder of The 200Bn Club and Nexera, summed up the design intent: “The digital euro is being designed as a payments rail, not a balance sheet, and the ceilings are there to make sure it never becomes one.” She added that big retail CBDC balances could weaken monetary-policy transmission or force the ECB to consider paying interest on retail central-bank money. Pushback: are caps protecting incumbents? Not everyone accepts the stability argument at face value. Critics say holding limits will also serve to shield the banking sector from competition. - Jonatan Randin, senior market analyst at PrimeXBT, pointed to a February 2024 ECB analysis showing limits are meant to preserve commercial banks’ economic role. He cited a Copenhagen Economics study estimating that widespread CBDC adoption with no caps could cut banks’ net interest income by an average of 7% — rising to 13% for smaller lenders. - Arthur Breitman, founder of the Tezos blockchain, warned the caps prevent sudden deposit flight into effectively riskless central-bank money, which protects bank funding models but also highlights how dependent lending is on commercial banks. Global context: sovereign CBDC vs private stablecoins The debate also maps onto broader global choices about digital money. Charles d’Haussy, CEO of the dYdX Foundation, contrasted Europe’s commitment to a sovereign, regulated CBDC designed for monetary control and privacy with other markets — notably the U.S. — that favor private stablecoins for speed, innovation and global reach. Bottom line The Council’s endorsement makes the digital euro more politically viable — but it comes with a clear constraint: holding caps to stop retail CBDC balances becoming a store of value. Policymakers see those limits as a necessary guardrail to protect financial stability and monetary policy. Critics counter that the same guardrails may blunt the digital euro’s utility and insulate incumbent banks from meaningful competition. The tension between delivering a modern, trusted payments tool and preserving the existing financial system will shape the next phase of digital-euro design and legislation. Further reading: the ECB has also warned that stablecoin growth could destabilize bank funding, and senior officials are reportedly shifting focus from interest-rate strategy toward planning a digital-euro rollout. Read more AI-generated news on: undefined/news