Politico reported that some European states, including Germany, France, the Netherlands and six other countries, are concerned about the European Central Bank (ECB) having the right to set a holding limit for the digital euro central bank digital currency (CBDC). are

One concern is that the ECB could set wallet limits too high, leading to an outflow of deposits from banks. One diplomat described it as a “power struggle” between central bankers and politicians. A counter-concern is that the limits could be seen as stifling financial freedoms and hence a Big Brother initiative. A related concern is that digital currency may be out of step with consumer needs and may not be adopted.

While the EU treaty gives the ECB some concessions, the digital euro will have its own legislation, which has yet to be approved. Several amendments were proposed in a draft before the recent European elections. POLITICO looked at notes from one of the meetings, which show that nine countries objected to the ECB deciding on a limit on holding the purse strings.

If the ECB sets a holding limit, it sees it as protecting any decision from political pressure.

How will the digital euro holding limit work?

A few important points were not covered in the Politico piece. First, the whole purpose of the digital euro is to create a pan-European payment system in an attempt to break the dominance of non-European players such as Visa and MasterCard. While SEPA may be pan-European, it is purely a back-end solution. Therefore, it seems logical that there needs to be a single threshold for the entire EU bloc.

If the ECB does not decide, how will it work in practice? Annual vote on limits?

Dirty Waterfalls

The sticking point is the enforcement of holding limits. If the holding limit is €3,000 and someone receives money that exceeds the balance, any excess will be transferred to the bank account. On the other hand, if someone makes a payment and doesn’t have enough digital euros in their wallet, they can automatically withdraw the money from the linked bank account. These are waterfall and reverse waterfall functions.

This has a few implications. On a practical level, some people like to keep track of how they spend money. If there is a lot of movement between your bank and digital eurowallet, it becomes too messy and difficult to track. Lack of visibility also helps fraudsters.

A transformative strategy, one of the potential benefits of CBDC is that it can provide highly efficient payments. However, with waterfall and reverse waterfall, some payments can have three payment legs: the sender doesn’t have enough funds so they withdraw money from their bank. CBDC payments; And the recipient now has a lot more in their wallet, so it goes into their bank account. Therefore, many countries believe that there will be pressure to provide higher limits, so there is less need to use waterfall functionality.

Some have noted that Waterfall would also require all EU banks to support 24/7 real-time payments, which involves significant work. However, EU instant payment regulations were adopted earlier this year, so this will be a requirement with or without the digital euro.

Discussion on setting holding limit

In one of the recent legislative proposals, it was suggested that banks and payment providers could set the limits themselves. The Dutch central bank has published a digital euro paper concluding that holding limits will be important, especially during the transition phase. Another report released by the European Banking Federation found that a €3,000 cap would increase bank funding costs by €8.8 billion with a 40% take-up.

For its part, the ECB says it will set limits based on economic conditions at the time of launch. However, one task it has been working on recently is coming up with a mechanism to make the decision.




Source link