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The Council of the European Union has backed plans by European Central Bank to create a digital euro, as it has also endorsed proposals to ensure limits to the amount of digital euro residents are allowed to hold.
Commenting on this development on its official website, the Council stated that "the digital euro is an evolution of money and could be a useful addition to existing financial infrastructure". However, it also emphasized that "to achieve this goal of a payment system rather than a store of value, limits of holdings will have to apply to a digital euro".
The Council, which is a representation of ministers from all 27 member countries in the European Union and a major contributor in determining European legislation, indicated that there would be an element of avoiding negative effects on financial stability as a result of digital euro balances. The major concern by the regulators relates to huge imbalances in removals from commercial banks.
Preventing pressures on banks
As stated by ECB policymakers and experts, the threat is that the widely accepted digital euro may have the propensity to directly compete with bank deposits. During periods of financial difficulties, people may swiftly transfer money from banks into the digital euros they hold at the central bank.
In the euro area, the vast majority of money in circulation is issued by commercial banks as credits. If the massive movement of deposits to digital wallets happens, it could shrink the balance sheets of banks, increase their cost of funding, and even unintentionally stiffen monetary conditions. In this light, caps are viewed as safety measures rather than technical issues.
ECB officials have expressed similar worries in previous instances about the rising use of stablecoins, where the wide-scale adoption of private digital currencies may also suck deposits out of banks and generate more volatile funding for them.
A payment system, and not a savings option
The supporters of the caps believe that they help the purpose behind the digital euro in becoming clear. Since the plan is to make the digital euro a rail system for payments and not a substitute for bank accounts, the caps help make this possible.
However, according to critics, this policy also protects banks from competition. For, by ensuring that citizens do not hold large balances of risk-free money issued by the central bank, this system maintains a source of deposits, which remains a key source of profits for the banks.
Some observers reference research that indicates an unreserved uptake of digital euros could contribute significantly to reduced net interest income for banks, specifically smaller ones. It is clear that the limiting factor is not innovation but maintaining the status quo.
A global comparison
A World Comparison It throws light on an ever-increasing split in global policies on digital money. While Europe favors an orderly regulated digital money under its sovereignty, other regions like the United States favor private stable coins as an innovative catalyst. At heart, the debate is just the embodiment of this paradox within digital currency designs for central banks: the appropriate blend of modernizing the payment system and providing the public with a trusted digital option that does not derogate from the financial infrastructure for credit facilitation. At present, the EU policymakers seem satisfied with the view that holding limits should be necessary for this purpose.

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