The European Central Bank (ECB) is trying to allay banks’ concerns about the massive outflow of accounts in the wake of the introduction of a digital euro. ECB director Piero Cipollone dismissed these fears as ‘unfounded’ in a blog article on Monday: ‘A digital euro will be designed as a means of payment and not for investments.’
Technology companies that issue stablecoins, for example, could pose a much greater risk to banks’ funding. Financial institutions are therefore on the wrong track if they follow studies that ignore the design features of a digital euro.
One of the concerns in the banking sector is that with the introduction of a digital version of the euro, their customers will withdraw a large part of their money from their accounts and transfer it to the digital euro instead. Banks would then lose an important source of refinancing their loans; their ability to make loans would be significantly limited.
Risks combated in advance
“However, central banks have analyzed this problem and found ways in advance to combat such risks,” says the blog article written by Cipollone together with Ulrich Bindseil, Director General of Infrastructure and Payments, and ECB advisor Jürgen Schaaf. With a digital euro, the combination of holding limits and the lack of compensation would greatly reduce the incentives to hold large amounts of money in a digital euro wallet.
In addition, according to the authors, there is the so-called reverse waterfall principle. It says that if the wallet does not contain enough digital euros to make a payment, the missing amount would automatically flow out of a docked account and fill this gap.
Banks on the wrong track
Banks are on the wrong track if they rely on studies that overlook the outlined design features of a digital euro, the authors write. Users would use the digital euro as a means of payment instead of for investments. Moreover, banks could always offer a higher fee for holding deposits.
In October, the ECB gave the green light for the next steps towards a digital euro. In this preparation phase, the regulations must now be finalized and providers selected for the development of the platform and infrastructure. This phase started at the beginning of November and will initially last two years.
Source: Krone
I’m Ben Stock, a journalist and author at Today Times Live. I specialize in economic news and have been working in the news industry for over five years. My experience spans from local journalism to international business reporting. In my career I’ve had the opportunity to interview some of the world’s leading economists and financial experts, giving me an insight into global trends that is unique among journalists.
