ECB Tries to Combat Commercial Bank Fears over Lost Deposits

Since last November, the digital euro has been in the preparation phase, which includes finalising the CBDC rulebook and selecting providers that could potentially develop a digital euro platform and infrastructure. The ECB is publishing plenty of information on the project, apparently trying to get support from future users and commercial structures.

The latest publications mainly address widespread concerns about privacy issues and possible bank disintermediation. The ECB experts claim that the CBDC will be designed for making payments, not for investment, so its appearance won’t lead to banks losing deposits. The holding limits, the “reverse waterfall” mechanism, and the absence of remuneration are features that are expected to prevent the digital euro from ousting commercial banks or accelerating bank runs. The authors claim that banks could also offer higher remuneration to retain deposits.

The ECB claims that the banks mistakenly consider the CBDC to be their main enemy, forgetting about financial and blockchain projects sponsored by big tech companies:

“Moreover, new players might pose a greater risk to bank funding than CBDCs. Stablecoins, e-money institutions and other narrow bank constructs… do not care about the role of banks in the economy. Non-banks have no obvious incentive to limit the use of their stablecoins or the services they offer… Banks are barking up the wrong tree when they rely on studies that overlook the outlined design features of a digital euro. In doing so, they ignore the many other challenges they need to address to ensure stable funding through deposits.”

To the project's critics, the ECB also suggested that the studies sponsored by the banking system are overly focused on future volumes of digital euro. The correct variable for analysis, argues the ECB, is central bank money in circulation, which also includes banknotes. 

Addressing privacy concerns, the ECB claims that the digital euro will be usable offline, being similar to cash in this form, while its online form will possess very high standards of privacy, “higher in fact than what commercial solutions currently offer.” 

Last December, we Observed that the proposals for the digital euro appeared fairly unappealing to several experts, ranging from strong supporters of a euro CBDC to outright opponents, with the setting of holding limits the main topic for discussion. The problem is that if the ECB sets a low holding limit for deposits, people will not have enough reason to use it, but if the Central Bank doesn't set a limit, banks potentially lose their key role as payment providers. The ECB suggested that a holding limit of €3,000 per person “would be effective in containing the impact on banks’ liquidity risks and funding structures.”

It seems that the ECB’s attempts to raise digital euro loyalty have not been successful at all. Comments on social media suggest that users do not understand the advantages of the CBDC, see multiple flaws in its structure, are afraid of the potential lack of privacy and generally do not trust either the ECB or digital euro, preferring cash or stablecoins. 

According to the ECB, the decision on whether to issue a digital euro or not can only be taken at a later stage. The first stage of the current phase will last for two years, so even if everything goes smoothly, it may still take a long time before we can use the digital euro in everyday life. The decision cannot be taken before adopting a legislative framework, which is currently being debated in the European Parliament.