Original Source: Ledger Insights
The President of the Deutsche Bundesbank, Dr. Joachim Nagel, shared new details about plans for a digital euro during a July speech. While he covered the usual motivations and risks of a central bank digital currency (CBDC), he added some detail on how holdings of digital euros might be limited.
In the past, there has been a reference to imposing a hard cap on holdings of around €3,000. And in a June speech, European Central Bank (ECB) board member Fabio Panetta shared the current analysis of limiting the total digital euros to between one and 1.5 trillion, equivalent to €3,000 to €4,000 per person.
Nagel confirmed that for individuals, there would likely be a hard cap limit. If someone sends you money that puts you over the limit, rejecting the payment wouldn’t be very user-friendly. So instead, any excess will be swept into your commercial bank account.
But merchants and businesses will also use digital euros. What might their fixed cap be? Instead of coming up with some awkward measure – presumably based on revenues – the likely path is ‘tiered remuneration’. In other words, if a company holds a substantial amount of digital euros, the interest rates will make doing so unattractive.
Dr. Nagel observed that the threshold values for these interest rates would need to be carefully chosen. These values and the level of any hard cap for indviduals would only be defined shortly before launch.
A key driver behind putting caps on the quantity of digital euros in circulation is to avoid bank deposits switching to central bank money en masse. This could impact the ability of banks to lend money and have a knock-on effect on the economy. Limiting holdings also helps to reduce the risk of switching to central bank money in the event of a bank run.
Cross border payments
The Bundesbank president also discussed CBDC for cross border payments, or multi-CBDC, including automating foreign exchange. He referred to different frameworks previously outlined by the BIS to enable interoperability. At the one extreme central banks could agree on standards. At the other, they could use a single platform. Dr. Nagel acknowledged that some path in between is the most likely. He didn’t delve into details, but one of the multi-CBDC initiatives, Project Dunbar, highlighted a critical potential blocker: if central banks limit local CBDC access to domestic banks, there’s a risk of replicating the inefficiencies of the current correspondent banking system.
