President of the Bundesbank: – The digital euro harbors both opportunities and challenges

“Digital central bank money offers a special opportunity to make international payments faster, cheaper and more transparent,” said Nagel. It is important to design central bank digital money systems in different currency areas so that they can “talk to each other” so that transactions can be executed cross-systems.

However, there are economic, technical, legal and political challenges in implementing this interoperability. “If they are properly mastered, the deficits in cross-border payment transactions can be significantly reduced,” said Nagel. “We shouldn’t just leave that to volatile crypto-assets or stablecoins in closed ecosystems.”

It is therefore “all the more important to continue the investigations for a digital euro with great care and also to take international aspects into account,” said Nagel. “In my opinion, we should take advantage of the opportunities offered by central bank digital money. It has great potential.”

Upper limits against turbulence in the financial system
However, according to Nagel, precautions should be taken when introducing a digital euro to prevent disruptions in the banking and financial system. “That is why we are thinking about measures at an early stage to avoid an excessive and choppy shift of deposits at commercial banks to the digital euro.”

According to Nagel, there are two possible forms of upper bounds. For example, there may be fixed stock limits for holding digital euros. ECB director Fabio Panetta once introduced a possible upper limit of 3,000 euros to the discussion. According to Nagel, threshold values ​​are also conceivable, above which there is a risk of unattractive interest rates.

“Fixed limits would provide an effective limit on the number of digital euros in circulation,” said Nagel. A tiered interest rate, on the other hand, would create more flexibility to meet the demand for the digital currency. “Especially during the introductory period, fixed caps for individuals could be better suited to avoid disruptions in the financial system. But even with an upper limit, payments in digital central bank money must be simple and efficient. His idea: too much credit in digital euros could be automatically transferred to a bank account.

“For businesses and retailers that accept payments on a larger scale, tiered interest rates may be more appropriate from the get-go,” says Nagel. However, according to him, thresholds should be set in such a way that money is not taken from bank accounts on a large scale and converted into digital euros. Where those upper limits or thresholds lie, however, will only be determined shortly before the introduction of the digital euro, says Nagel.

Monetary authorities investigate possible introduction
The euro area currency watchdogs have been investigating the possible introduction of a digital version of the European single currency for some time now. In mid-July 2021, the European Central Bank decided to take the preparatory work to a higher level: a two-year research phase will now focus on, for example, technology and data protection.

It has not yet been decided whether there will be a digital euro. In any case, a digital euro would complement cash, not replace it.

The work on a digital euro is a response of the euro central banks to the sharp rise in so-called cryptocurrencies such as bitcoin and ether. The big difference: A digital euro, on the other hand, would be overseen by a central bank that would ensure the stability of the currency. Other central banks around the world are also dealing with digital central bank money.