European Central Bank’s executive proposes a fine for hoarding digital euro.

A digital euro has been one of the most anticipated sovereign digital currencies, and an ECB executive has proposed a fine for hoarding the digital euro.

The digital euro has been one of the most anticipated government-backed digital currencies alongside China’s digital yuan. However, as one executive of Europe’s apex bank observes, it could lead to commercial banks disintermediation. The ECB executive proposed a €3,000 threshold for users to hold, beyond which they would incur a penalty, such as negative interest rates. Fabio Panetta, an executive board member at the ECB, shared his thoughts on the digital euro during a recent online event.

 

“CBDC is Europe’s chance to jump onto the digital payments bandwagon.” 

The Italian economist touted the CBDC as Europe’s chance to jump onto the digital payments bandwagon. However, the ECB must consider all the economic, financial, and societal implications of such a move. “Paradoxically, a digital euro may prove too successful. If it is not properly designed, its main strengths—safety and liquidity—could affect monetary and financial stability,” Fabio Panetta stated in his speech. One of the areas which he believes a digital euro would most affect is financial intermediation and capital allocation. Users could starve commercial banks of the critical deposits as they shift to depositing with the central bank. 

 

Hoarding digital euro would constrain the economy in the long run.

The effects of hoarding a digital euro would include more costly funding, lower profitability, and consequently, lower lending. This would constrain the economy in the long run. Panetta believes there’s a way to design the digital euro to overcome such a bottleneck. The first option would be to limit the amount of digital euro that users can hold with the ECB. This would allow the ECB to prevent large inflows of bank deposits into the central bank. It would also prevent investors from bringing in volatile portfolio inflows from abroad into the ECB. 

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Jai Pratap
Jai Pratap
A Mass Media Graduate who loves to write. Jai is also a sports enthusiast and a big movie buff. He loves to learn new things.

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