A group of economists assessing the potential impact of a digital euro insists that restrictions on the use of the upcoming currency are necessary to protect the current financial system. Their research follows an earlier proposal to limit the European Central Bank’s (ECB) digital euro deposits to 3,000 euros per person.
The limited availability of the digital euro is expected to prevent it from becoming too popular
According to a report published by the European Central Bank, the use of the digital euro by Europeans should be restricted to prevent capital flight from deposits in commercial banks. The paper was written by a team of experts led by Frank Smets, head of the regulator’s Directorate-General for Economic Affairs.
Economists are trying to predict the impact of a central bank digital currency (CBDC) on European banking. In the absence of empirical data, they considered the public’s reaction to news that the ECB plans to issue a digital version of the European common currency.
As part of research released by the monetary authority on Thursday, the authors concluded that the optimal amount of a digital euro in circulation should be between 15% and 45% of the euro area’s quarterly real gross domestic product (real GDP) Inflation-adjusted economic output.
The calculation follows previous recommendations that central bank digital currency accounts should be capped at €3,000 per person ($3,070 at current exchange rates). The limit, proposed by ECB board member Fabio Panetta to ensure there is enough fiat currency to back loans, is roughly in the middle of the range, at 34%.
If a European CBDC were to be issued without a limit on the number, then the number of digital currencies in circulation would be much larger, possibly reaching 65% of the eurozone’s quarterly real GDP. That would have a bigger impact on banks’ valuations and lending, the researchers said.
The analysis by ECB economists is based in part on public statements by European officials about the design of a digital euro. In June, Panetta said that keeping digital euro holdings between 1 and 1.5 trillion euros would help avoid potential negative effects on the European financial system and monetary policy.
He also noted that this total is comparable to the current holdings of banknotes in circulation. The current population of Eurozone countries is around 340 million, which would allow each person to hold between 3,000 and 4,000 digital euros.
In mid-July, ECB officials and the bank’s president, Christine Lagarde, said in an article that the investigation phase of a CBDC project would take at least a year, but also flagged what they thought was clear. Some key principles.
Wide acceptance, ease of use, low cost, high transaction speed, security and consumer protection are attributes that users prefer, the two bankers said, promising that the digital euro will become a more efficient payment tool than cryptocurrencies.
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