EU Backs ECB's Digital Euro — Demands Strict Holding Caps to Protect Banks

Headline: EU backs ECB’s digital-euro push — but wants strict caps to prevent it becoming a “store of value” The Council of the European Union has signaled broad political backing for the European Central Bank’s (ECB) plan to explore a digital euro — while insistently demanding limits on how much anyone can hold in online accounts or digital wallets at any one time. In a Friday post, the Council described a digital euro as an “evolution of money” and a potential tool for financial inclusion, but said holding limits are needed to “avoid the digital euro being used as a store of value” and to protect financial stability. Why the caps matter The Council, which represents government ministers from the EU’s 27 member states and helps shape law alongside the European Parliament, framed its endorsement as a signal that national governments broadly align with the ECB’s design approach. But it also made clear that the central bank must prevent the retail digital euro from displacing commercial bank deposits — a shift that could accelerate bank runs in times of stress. “The holding limits are not just about abstract financial stability,” said Edwin Mata, co‑founder and CEO of tokenization platform Bricken. “They are about preventing the digital euro from competing directly with bank deposits. If people could hold unlimited digital euros, deposits could shift instantly from commercial banks to the ECB, especially during periods of stress, effectively accelerating bank runs.” Banks, credit creation and monetary transmission ECB officials have repeatedly warned about comparable risks from stablecoins such as Tether’s USDT and Circle’s USDC, arguing that significant stablecoin growth could prompt retail deposit outflows and weaken bank funding. Pedro Birman, CEO of Quadra Trade, pushed the point further: because most money in the euro system is created by commercial banks through lending, large-scale migration into self-custodied digital euros would shrink banks’ deposit bases, constrain credit creation, raise funding costs and produce an unintended form of monetary tightening — particularly in crises. “The message is clear: 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,” said Amber Ghaddar, founder and managing director at The 200Bn Club and Nexera. She warned that large retail holdings could also blunt the ECB’s ability to transmit monetary policy, potentially forcing difficult choices such as whether to pay interest on retail central-bank money. Economic trade-offs and industry skepticism Not everyone welcomes the caps. Critics say that while regulators frame limits as protecting financial stability, they also protect incumbent banks from competition and cap the digital euro’s usefulness. Jonatan Randin, senior market analyst at PrimeXBT, highlighted ECB analysis from February 2024 showing caps are intended to preserve commercial banks’ economic role and corporate deposit base. A Copenhagen Economics study cited by critics estimated that such a move could cut banks’ net interest income by about 7% on average, rising to 13% for smaller lenders. “Banks profit from holding customer deposits and lending that money out,” Randin said. “A digital euro without strict limits would give citizens a risk‑free alternative, reducing banks’ access to cheap funding.” Echoing that concern, Arthur Breitman, founder of the Tezos blockchain, said the caps aim to prevent sudden deposit flight into effectively riskless central‑bank money — a design choice that protects bank funding models but also underscores how reliant the current system is on commercial banks to extend credit. International contrast Industry figures also pointed out contrasting global approaches. Charles d’Haussy, CEO of the dYdX Foundation, contrasted Europe’s commitment to a sovereign CBDC with the U.S. and other dollar‑centric regions that favor private stablecoins for speed, innovation and scale. That divergence underscores broader policy choices between centralized monetary control and private-sector-driven solutions. Bottom line The Council’s endorsement increases the likelihood that upcoming EU legislation will align with the ECB’s blueprint: a retail CBDC designed first as a regulated payments rail, with holding limits as a guardrail against destabilizing flows into central‑bank money. Supporters say those limits are essential to protect banks, credit creation and monetary policy; critics argue they will blunt the digital euro’s potential and shelter incumbents from competition. The debate captures the central tension in CBDC design — how to offer a modern, trusted payment tool without undermining the financial system it sits beside. Read more AI-generated news on: undefined/news