Digital euro safeguards – protecting financial stability and liquidity in the banking sector

A digital euro would offer a wide range of

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https://www.ecb.europa.eu//pub/pdf/scpops/ecb.op346~3b4318a919.en.pdfhttps://www.ecb.europa.eu//pub/pdf/scpops/ecb.op346~3b4318a919.en.pdf
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Thursday, April 18, 2024
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Summary
Key Points: 
    • A digital euro would offer a wide range of
      financial stability benefits, including safeguarding the role of public money and
      strengthening the strategic autonomy and monetary sovereignty of the euro area in
      the digital era.
    • Keywords: CBDC, digital euro, bank intermediation, financial stability risks.
    • A digital euro has the potential to offer a wide range of financial stability
      benefits for the digital era.
    • A digital euro would
      stimulate financial innovation among private sector entities and enhance the
      efficiency and resilience of the financial system by supporting competition and
      diversity within it.3 In addition, a digital euro would strengthen the strategic autonomy
      and monetary sovereignty of the euro area.
    • A digital euro would be designed to minimise risks to the financial system.
    • 2

      The preparation phase will pave the way for a future decision on whether or not to issue a digital euro.

    • When gauging the implications for the euro area banking sector of introducing a
      digital euro, take-up would be key, as it would determine the level of deposit
      outflows.
    • In the latter case, the
      issuance of a digital euro would not affect banks? balance sheets, since banks would return euro
      banknotes to the Eurosystem in exchange for digital euro.
    • Banknotes and digital euro are two different
      types of central bank liability, so a swap between banknotes and digital euro would only affect the
      composition and not the size of the Eurosystem?s balance sheet.
    • In our analysis, we model only the
      substitution of commercial bank deposits with a possible future digital euro.
    • 8

      The legislative proposal on a digital euro provides for the inclusion of such safeguards and establishes
      specific criteria for the limits, aiming to contain the use of a digital euro as a store of value.

    • ECB Occasional Paper Series No 346

      4

      2

      The added value of digital euro
      safeguards such as holding limits
      To understand the benefits of digital euro safeguards, such as holding limits, it
      is useful to first consider the implications of introducing a CBDC without
      adequate safeguards.

    • (2022), ?Central bank digital currency and bank intermediation: Exploring different
      approaches for assessing the effects of a digital euro on euro area banks?, Occasional Papers, No 293,
      European Central Bank, Frankfurt am Main, May.
    • deciding to adopt the digital euro, and (ii) the average amount of digital euro in a
      wallet.
    • At the same time, as discussed in this paper, the design of a digital euro would
      include effective safeguards, such as individual holding limits, to mitigate
      potential financial stability risks.
    • ECB Occasional Paper Series No 346

      15

      an upper bound on the amount of digital euro in circulation, thereby addressing and
      limiting financial stability concerns associated with the introduction of a digital euro.

    • (2023), ?A digital euro: gauging the
      financial stability implications?, Financial Stability Review, ECB, November.
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