European Union Moves to Limit Digital Currency Holdings

The Council of the European Union has formally endorsed the European Central Bank's proposal to implement holding limits on the digital euro, marking a significant regulatory step toward the potential launch of a central bank digital currency (CBDC). The decision reflects deep-seated concerns within the bloc's financial regulatory framework.

Addressing the "Bank Disintermediation" Fear

At the core of the proposal is the fear of "bank disintermediation"—a scenario where citizens and businesses move large portions of their deposits from commercial banks into the new, potentially safer, digital currency issued directly by the ECB. This could severely restrict banks' ability to lend, destabilizing the traditional credit system that fuels the European economy.

"The design of the digital euro explicitly aims to preserve the role of banks in the financial system," a Council statement indicated. The holding caps are intended to ensure the digital euro functions strictly as a digital cash equivalent for everyday payments, not as a form of investment or large-scale savings vehicle that competes with bank deposits.

Design and Implementation Framework

While the exact ceiling for individual holdings remains under discussion, the endorsed framework provides the ECB with the necessary regulatory backing to finalize its technical rulebook. The design principles now have political validation, focusing on:

  • Strict holding limits for individuals and possibly businesses.
  • Offline functionality for small, private transactions.
  • Integration with existing private payment service providers for distribution.
  • Zero remuneration (no interest) to further discourage its use for savings.

The Council's backing is a crucial prerequisite for the next phase of the project. The ECB's Governing Council is expected to make a final decision on whether to proceed to the realization phase of the digital euro later this year.