On the digital euro holding limits

One of the discussions on the creation of the Digital Euro (European Central Bank 1, which is currently considering the Central Bank's digital currency) is about its own limit. This limit determines the maximum value of the digital euro held by consumers, and is currently proposed between 3, 000 and € 4, 000.

The ECB also proposes a s o-called "waterfall" method, which automatically links the amount of digital Euro to the user's bank account. If the user lacks the digital Euro required for payment, the linked bank account will replenish the digital euro directly. This guarantees a smooth and efficient payment, but clearly causes a desired collision.

ECB argues that one of the legitimate reasons for the creation of digital Euro is to provide currency support to the economic economy, as in the role of today's cash. To do so, consumers need to hold sufficient digital euro.

However, the ECB also claims that digital Euro is modern and widely accepted and provides a roots in Europe. In cooperation with the waterfall system and the bank account, there is no need to replenish inventory every time a digital Euro is used. Because of the convenience of automatically added from bank accounts, consumers will hardly have a large number of digital euros. If so, why do consumers open a digital Euro account? As a result, Digital Euro may not provide the intended currency anchor.

How to decide the holding limit

Central Bank Digital Currency (CBDC) as an opportunity for financial system reform (CBDC)

Under the idea that it may provide opportunities to change financial systems, there are many authors' arguments that support the increase in holding of central bank digital currency (CBDC) or in some cases to hold unlimited. I have come. For example, if a reward is paid to digital Euro (that is, if the ownership of digital Euro is given interest, a better transmission of monetary policy is possible (currently not planned). ) (Claeys and Demertzis, 2019), CBDC is more fluid (niepelt, 2024).

One of the arguments on the creation of Digital Euro (the Central Bank 1, which is currently being considered by the Central Bank 1), which minimizes the confusion of the financial system, is related to the ownership limit. This limit determines the maximum value of the digital euro held by consumers, and is currently proposed between 3, 000 and € 4, 000.

Central Bank Digital Currency (CBDC) as an opportunity for financial system reform (CBDC)

One of the discussions on the creation of digital Euro, which minimizes the confusion of financial systems (European Central Bank 1, the Central Bank digital currency currently being considered) is about the holding limit. This limit determines the maximum value of the digital euro held by consumers, and is currently proposed between 3, 000 and € 4, 000.

How much digital cash is needed?

_{Central Bank Digital Currency (CBDC) as an opportunity for financial system reform (CBDC)}

Minimize the confusion of the financial system

Despite the above advantages, the Central Bank does not want to change the financial system by establishing a CBDC. The reasons for the central bank to introduce digital currencies are different (see Demertzis and Martin, 2023), but all central banks agree in order to minimize the confusion caused by the financial system. I am. This also applies to ECB (Panetta, 2022).

Conclusions

All central banks are asking what the upper limit of holding should be if they do not hinder financial intermediary even if the CBDC is captured in full. Bindseil (2020) explained the ECB concept on the digital Euro holding limit. If each individual transfers this upper limit from a retail account to a digital Euro account, the total retail deposits of each bank will decrease by 15 %. This is equivalent to about 1 trillion euros, which is equivalent to the value of the currently distributed banknotes. From a consumer perspective, 3000 euros are the average pure monthly income of households in the euro.

The value added of central bank digital currencies: a view from the euro area

On the other hand, England Bank is considering significantly increasing the limit per person from £ 10, 000 to £ 20, 000 (Cunliffe, 2023). The background of this upper limit is the same reason as ECB. Nevertheless, there is no strict limit on the limit, and it is possible to change it after the introduction of the digital pound. The digital pound account of the company has not been set yet, but it will be set higher than for individuals, considering that the company has high liquidity needs (Bank of English and Hm Treasure, 2023. ) Despite the above advantages, the central bank does not want to change the financial system by establishing a CBDC. The reasons for the central bank to introduce digital currencies are different (see Demertzis and Martin, 2023), but all central banks agree in order to minimize the confusion caused by the financial system. I am. This also applies to ECB (Panetta, 2022).

The basis for setting up a maximum balance of the central bank is to prevent the money transfer from the bank account to the central bank account from reducing the amount of private deposits in a way that has a significant economic impact on financial intermediary. However, as shown in Table 1, the numbers derived by the central bank are very different. For digital euros, Bidder et al (2024) proposes a different holding limit to the ECB, arguing that the amount between 1, 500 euros and 2, 000 euros guarantees financial stability and enhances wage. All central banks are asking what the upper limit of holding should be if they do not hinder financial intermediary even if the CBDC is captured in full. Bindseil (2020) explained the ECB concept on the digital Euro holding limit. If each individual transfers this upper limit from a retail account to a digital Euro account, the total retail deposits of each bank will decrease by 15 %. This is equivalent to about 1 trillion euros, which is equivalent to the value of the currently distributed banknotes. From a consumer perspective, 3000 euros are the average pure monthly income of households in the euro. On the other hand, England Bank is considering significantly increasing the limit per person from £ 10, 000 to £ 20, 000 (Cunliffe, 2023). The background of this upper limit is the same reason as ECB. Nevertheless, there is no strict limit on the limit, and it is possible to change it after the introduction of the digital pound. The digital pound account of the company has not been set yet, but it will be set higher than for individuals, considering that the company has high liquidity needs (Bank of English and Hm Treasure, 2023. ) Despite the above advantages, the Central Bank does not want to change the financial system by establishing a CBDC. The reasons for the central bank to introduce digital currencies are different (see Demertzis and Martin, 2023), but all central banks agree in order to minimize the confusion caused by the financial system. I am. This also applies to ECB (Panetta, 2022).

Recommended citation:

From a similar perspective, Li et al (2023) indicated that the limit of $ 25, 000 (about 17, 000 euros) is effective in avoiding financial systems. Again, they propose the need to maintain the benefits provided by private financial agencies, so they aim to avoid excessive shifts from personal deposits to digital currencies.

Finally, China's central bank has already provided digital yuan to the people. Unlike the uniform settings that the ECB is currently considering, there are various options ("wallet") that consumers can choose in the digital People's yuan. The holding limit varies depending on the identity verification level, and the lower the anonymity, the higher the holding limit. Questions about the holding limit are generally made from the maximum amount that can be held without confusion. It is also necessary to ask how much the minimum amount for digital Euro to become a financial anchor in the digital payment system.

Share this page:

Digital Euro intends to be a substitute for cash (but is not completely anonymized), and pays attention to cash distribution per person as a substitute for cash demand. Figure 1 shows the amount of cash held by consumers in the Eur o-sphere of countries early the day. There is a width from 121 euros in Austria to the lowest in the Netherlands. Fig. 1: Average amount of cash in the wallet at the beginning of the day (by country) Source ECB, Space Report 2022 If Digital Euro is used in the same way as actual cash, the numbers in Fig. 1 have a very generous amount of 3, 000 to 4000 euros, which are currently proposed, and the lower limit is sufficient. Suggests that. On the other hand, England Bank is considering significantly increasing the limit per person from £ 10, 000 to £ 20, 000 (Cunliffe, 2023). The background of this upper limit is the same reason as ECB. Nevertheless, there is no strict limit on the limit, and it is possible to change it after the introduction of the digital pound. The digital pound account of the company has not been set yet, but it will be set higher than for individuals, considering that the company has high liquidity needs (Bank of English and Hm Treasure, 2023. ) Despite the above advantages, the Central Bank does not want to change the financial system by establishing a CBDC. The reasons for the central bank to introduce digital currencies are different (see Demertzis and Martin, 2023), but all central banks agree in order to minimize the confusion caused by the financial system. I am. This also applies to ECB (Panetta, 2022). On the other hand, England Bank is considering significantly increasing the limit per person from £ 10, 000 to £ 20, 000 (Cunliffe, 2023). The background of this upper limit is the same reason as ECB. Nevertheless, there is no strict limit on the limit, and it is possible to change it after the introduction of the digital pound. The digital pound account of the company has not been set yet, but it will be set higher than for individuals, considering that the company has high liquidity needs (Bank of English and Hm Treasure, 2023. ) Despite the above advantages, the Central Bank does not want to change the financial system by establishing a CBDC. The reasons for the central bank to introduce digital currencies are different (see Demertzis and Martin, 2023), but all central banks agree in order to minimize the confusion caused by the financial system. I am. This also applies to ECB (Panetta, 2022).

Retail Bank is concerned that the digital euro's upper limit of € 3000 to 4000 euros will lose a considerable amount of funds that can be used freely and will not be able to intermediary. Assuming that digital Euro is widely used, banks will lose money to make a profit. If Digital Euro imitates how to operate cash, the amount of holding may be too large compared to the current cash.

On the other hand, the waterfall method is undoubtedly increased the convenience of payment, but also loses the incentives that owns digital Euro. So why do consumers open a digital Euro account? ECB must persuade the people that Digital Euro will be an excellent digital currency equal to the current anchor of the current system.
Central bank digital currencies are added, but not the same in any country.
Issued date June 12, 2023
Author MARIA DEMERTZIS CATARINA MARTINS
1. Chapter
2. Reading time 38 minutes
Reading time 38 minutes

1 Introduction

Quotation

Demertzis, M. and C. Martins (2023) 'The value added of central bank digital currencies: a view from the euro area', Policy Brief 13/2023, Bruegel.

Copy to the clipboard

Twitter

link

Facebook

Chapters

Each chapter

Summary

2 The emergence of CBDCs

The reason for creating the Central Bank Digital Currency (CBDC) varies from country to country. Some countries, especially countries where CBDC is already operated for retail, aims to promote financial inclusiveness. However, in countries where most people can access financial services, central banks are interested in CBDC as one aspect of digitization of finance.

The central bank can use the CBDC to guarantee the entire assets of the people (currently the bank deposits are only partially guaranteed), but this is the role of the Bank of Commercial in the brokerage. It will make a big change to the financial system in terms of the role of conversion money. So far, the Central Bank has not choosing this method.

In the euro area, consumers have multiple means of payment and use a very efficient retail payment system. Currency is highly reliable, and has not been exposed to the appearance of civil currency like bitcoin or the risk of extinguishing cash, an anchor of the currency system. Therefore, the establishment of a retailing CBDC in the euro area, at least for the time being, has almost no obvious added value.

However, building CBDCs that can be used for banks over borders (that is, transactions with other currencies) is strongly persuasive. For two reasons, Hall Sale CBDC may revolutionize the cros s-border and cross currency payment method.

_{Cross border payments are currently inefficient and inefficient. The Pilot Project shows that Hall Sale payments using CBDC can greatly save time and cost.}

The two central banks operated by the Hall Sale CBDC can settle transactions between banks. Most of the current settlements are performed through the dollar (and the euro) infrastructure, and this will be very different from the current system.

From a geopolitical perspective, the Euro sphere and the United States will need to carefully consider how Hall Sale CBDC affects its global economic status. By developing a CBDC for the hole sale, the EU will be able to contribute to the world standard development.
Central Bank Digital Currency (CBDC), a digital currency equivalent to cash, is increasingly attracting attention. At least 114 countries and regions, equivalent to 95 % of the world GDP, are at the stage of developing CBDC 1. In 11 countries, CBDC is a reality and is operated in parallel with physical equivalents. However, it is not always easy for consumers to understand the differences between coins and bills and digital Euro. The Central Bank can use the CBDC to guarantee the entire assets held by the people (currently the bank deposits are only partially guaranteed), but this is a commercial bank in intermediary. It will make a big change in the financial system in terms of roles and the role of unexpected banknotes. So far, the Central Bank has not choosing this method.
In the euro area, consumers have multiple means of payment and use a very efficient retail payment system. Currency is highly reliable, and has not been exposed to the appearance of civil currency like bitcoin or the risk of extinguishing cash, an anchor of the currency system. Therefore, the establishment of a retailing CBDC in the euro area, at least for the time being, has almost no obvious added value.

Cross border payments are currently inefficient and inefficient. The Pilot Project shows that Hall Sale payments using CBDC can greatly save time and cost.

3 The case for a retail CBDC

From a geopolitical perspective, the Euro sphere and the United States will need to carefully consider how Hall Sale CBDC affects its global economic status. By developing a CBDC for the hole sale, the EU will be able to contribute to the world standard development.

3.1 Cryptocurrencies are not taking over payments

Central Bank Digital Currency (CBDC), a digital currency equivalent to cash, is increasingly attracting attention. At least 114 countries and regions, equivalent to 95 % of the world GDP, are at the stage of developing CBDC 1. In 11 countries, CBDC is a reality and is operated in parallel with physical equivalents. However, it is not always easy for consumers to understand the differences between coins and bills and digital Euro. The central bank can use the CBDC to guarantee the entire assets of the people (currently the bank deposits are only partially guaranteed), but this is the role of the Bank of Commercial in the brokerage. It will make a big change to the financial system in terms of the role of conversion money. So far, the Central Bank has not choosing this method.

Cross border payments are currently inefficient and inefficient. The Pilot Project shows that Hall Sale payments using CBDC can greatly save time and cost.

_{We argue that CBDC is added, but this is not the same in any country. In countries where the level of financial exclusion is high and the modern and reliable digital payment system is insufficient, CBDC can promote many people access to payment. However, in a country where there is a sufficient payment solution and financial exclusion is secondary, its legitimacy is different. The central bank is concerned that two things may happen as the financial digitization progresses. Both may weaken the monopoly of the soblin money. The Central Bank is afraid that this will impair the ability to maintain financial and financial stability.}

In other words, it is a retail purpose (a small part of the total payment) for daily payment by consumers and small and mediu m-sized enterprises, and the purpose of a jewel sale (bulk) for banks and other financial institutions in Japan. In the Euro area, most efforts have been focused on how to develop retail CBDC. Only recently, there have been movements to examine the aspect of the hall sale.

3.2 Cash is still popular

In terms of retail, the Digital Euro debate proposed by the European Central Bank is developed, focusing on the concepts of digitalization and strategic autonomy. Finance is overwhelmingly digitized and ultimately digital, threatens the existence of the Sobulin Money, which is a threatening the role of the guardian Central Bank. ECB also claims that most of the payments are managed by foreign companies, and they are collecting EU citizens confidential information. A Pa n-European payment method, which is extremely close to cash, will help to reduce these vulnerabilities. It also leads to the homogenization of payments in the euro area, and if access becomes easier, it will promote the Euro's international role. A good starting point for clarifying the advantages of CBDC is to understand the problem that cannot be solved by increasing the digital payment options provided by the private sector, and then needs a national intervention. It is. This is important in explaining why taxpayers are required to provide funds to the establishment of CBDC.

We argue that CBDC is added, but this is not the same in any country.

We argue that CBDC is added, but this is not the same in any country. In countries where the level of financial exclusion is high and the modern and reliable digital payment system is insufficient, CBDC can promote many people access to payment. However, in a country where there is a sufficient payment solution and financial exclusion is secondary, its legitimacy is different. The central bank is concerned that two things may happen as the financial digitization progresses. Both may weaken the monopoly of the soblin money. The Central Bank is afraid that this will impair the ability to maintain financial and financial stability.

_{In other words, it is a retail purpose (a small part of the total payment) for daily payment by consumers and small and mediu m-sized enterprises, and the purpose of a jewel sale (bulk) for banks and other financial institutions in Japan. In the Euro area, most efforts have been focused on how to develop retail CBDC. Only recently, there have been movements to examine the aspect of the hall sale.}

In terms of retail, the Digital Euro debate proposed by the European Central Bank is developed, focusing on the concepts of digitalization and strategic autonomy. Finance is overwhelmingly digitized and ultimately digital, threatens the existence of the Sobulin Money, which is a threatening role of the guardian Central Bank. ECB also claims that most of the payments are managed by foreign companies, and they are collecting EU citizens confidential information. A Pa n-European payment method, which is extremely close to cash, will help to reduce these vulnerabilities. It also leads to the homogenization of payments in the euro area, and if access becomes easier, it will promote the Euro's international role. A good starting point for clarifying the advantages of CBDC is to understand the problem that cannot be solved by an increase in the number of digital payments provided by a private sector, and requires a national intervention. This is important in explaining why taxpayers are required to provide funds to the establishment of CBDC.

We argue that CBDC is added, but this is not the same in any country.

3.3 Financial exclusion and the introduction of retail CBDCs

In terms of retail, the Digital Euro debate proposed by the European Central Bank is developed mainly on the concept of digitalization and strategic autonomy. Finance is overwhelmingly digitized and ultimately digital, threatens the existence of the Sobulin Money, which is a threatening the role of the guardian Central Bank. ECB also claims that most of the payments are managed by foreign companies, and they are collecting EU citizens confidential information. A Pa n-European payment method, which is extremely close to cash, will help to reduce these vulnerabilities. It also leads to the homogenization of payments in the euro area, and if access becomes easier, it will promote the Euro's international role.

_{But even if this reason is understood, at least at this time, it does not increase the persuasive power of retail digital Euro. There is no imminent threat that digitalization impairs the role of physical Euro. There is also a easier way to promote the construction of digital immediate payment methods that are unified in the EU through regulations, even if taxpayers do not provide funds to CBDC. On the other hand, European vulnerabilities arising from the existence of foreign players in the settlement area are a very delicate debate. Does the EU want to create European payment players at the expense of competition?}

Finally, the euro has a very stable international role after dollars and far away from the dollar. Digital currencies only can simply expand the Euro's international charm. If there are other factors related to the more integrated and wel l-managed European economy, the Euro's international reception will be more advanced. In addition, there are several technical options, such as limiting the amount of digital euro that the people hold and no rewards for these deposits, which also hinders the international use of the Euro. There is. In addition, the euro system has a very fast and efficient retail payment system, and can still be efficient in the current system. As a result, the appeal of digital Euro is further reduced.

However, the EU and the global financial system can really benefit by developing a Hall Sale CBDC for payment outside the euro area. This enhances the efficiency of all payments outside the EU area. In our opinion, the establishment of a global CBDC could revolutionize cros s-border payments. For now, one of the reasons why the dollar is chosen worldwide is that it provides infrastructure to settle the transaction between two. In principle, two countries with CBDC have the ability to bypass the current dolla r-based system and settle transactions between two countries. However, at least this reason does not increase the persuasive power of digital Euro for retail. There is no imminent threat that digitalization impairs the role of physical euro. There is also a easier way to promote the construction of digital immediate payment methods that are unified in the EU through regulations, even if taxpayers do not provide funds to CBDC. On the other hand, European vulnerabilities arising from the existence of foreign players in the settlement area are a very delicate debate. Does the EU want to create European payment players at the expense of competition?

However, the EU and the global financial system can really benefit by developing a Hall Sale CBDC for payment outside the euro area. This enhances the efficiency of all payments outside the EU area. In our opinion, the establishment of a global CBDC could revolutionize cros s-border payments. For now, one of the reasons why the dollar is chosen worldwide is that it provides infrastructure to settle the transaction between two. In principle, two countries with CBDC have the ability to bypass the current dolla r-based system and settle transactions between two countries. But even if this reason is understood, at least at this time, it does not increase the persuasive power of retail digital Euro. There is no imminent threat that digitalization impairs the role of physical euro. There is also a easier way to promote the construction of digital immediate payment methods that are unified in the EU through regulations, even if taxpayers do not provide funds to CBDC. On the other hand, European vulnerabilities arising from the existence of foreign players in the settlement area are a very delicate debate. Does the EU want to create European payment players at the expense of competition?

3.4 How popular are CBDCs?

However, before this is realized, a common world standard is required for how to design and use CBDC. This is a major barrier (BIS, 2022), as it requires mutual approval of the legal system and an agreement on economic and technical design issues. Global Governance has become a major obstacle to this revolution, and the Euro and the United States will have to carefully consider how the economic status of their country will be affected by the world.

For example, the current sanctions against Russia mean that countries that want to continue economic relationships with Russia cannot do it in dollars or euros. By accepting CBDC between all two countries, transactions can be continued, and sanctions can be avoided. As a result, the need for a dollar base in international payments is reduced, and the important thing as the option to return to the dollar in the future appears in the future. The division of international finance promotes the development of CBDC and may be part of the reasons for rapidly developed in recent years.	First, we will clarify how CBDC is different from physical cash. Figure 1 shows a monetary classification method. The CBDC, a digital form of the soblin currency, is a legal currency and is completely guaranteed by public institutions. For example, it is € 100, 000 in the euro area and $ 250, 000 in the United States. CBDC, a legal currency, is not rejected in each jurisdiction area as a means of paying or debt.	However, the statutory currency law is not enough to guarantee the reception of new currency, as shown in the literature (Lotz and Rocheteau, 2002). In the case of both sides of the market, reception is not only used by consumers, but also by the use by merchants who need to invest in the necessary facilities. This is a obstacle for CBDC and must be dealt with.	In addition, CBDC can be exchanged on e-o n-one with the other monetary forms (preparation balance and cash) of the Central Bank. The CBDC is as close as possible to the actual cash of almost instantaneously settled. However, although it may be technically secured, CBDC does not ensure anonymity as in actual cash. Finally, holding a CBDC means that each central bank directly debts, just like holding a bank ticket.
Figure 1: Classification of money	Source: quoted from Claeys et al (2018).	There are three main reasons why the central bank became interested in CBDC ideas:	The appearance of cryptocurrency. The Bitcoin Revolution provided personal issued and managed payment methods. If private money succeeds, especially if it can be used by everyone in the world in principle, it will be issued by public issued money (cash) or financial institutions, but partially monitored by public institutions. ・ There is a possibility that it will be replaced by the warranted unexpected bill. Private money is controlled by inflation and reduces the capabilities of central banks that monitor financial stability, to reduce money base managed by central banks. With CBDC, the Central Bank will provide digital money equivalent to public currency that imitates the technical characteristics of cryptocurrency.
The use of digital payments is expanded. Digitization of payments progresses in most economic sphere of cash. Cash is often referred to as an anchor of financial systems and provides the trust required for the entire system. What is worrisome is that reducing the use of cash in daily transactions reduces physical cash and impairs the trust of the system. If you have a digital currency equivalent to cash, you can maintain an anchor while responding to changes in your preference.	Access to payment systems and improvement of efficiency In some countries, CBDCs can expand financial inclusions in some countries where many people cannot access financial systems and digital payments. It is not a coincidence that countries that are already using CBDCs, such as Nigeria and Bahamas, have a major motive for financial inclusiveness. It is not a coincidence that countries that are already using CBDCs, such as Nigeria and Bahamas, have a major motive for financial inclusiveness. However, for the country where financial exclusion is a small and isolated problem, the efficiency of settlement has the advantage. This applies to payments that cross borders, and has the potential for CBDC to create a global standard for efficient and universally accepted international payments. CBDC has the potential to build global standards for efficient and universal international payments.	These three reasons are not all, but most of the countries propose. Other reasons for developing CBDC are that the issuance and management of actual cash is more expensive (Reserve Bank of India, 2022).	Supporting a wide range of applications for new technologies and innovation, strengthening business recovery and cyber security 3. Central banks around the world are trying this technology to determine which type of CBDC (retail and / or hall sale) provides added value to consumers and can cover the needs of consumers.

Currently, consumers (paymenters) who want to pay (payers) instruct the bank to remittance to the recipient's account. In this transaction, the amount moves from one bank to the other bank and is settled by the Central Bank. However, in the CBDC, both the payment and the recipient have an account directly to the central bank. Commercial banks are not involved. Both payments and payments are performed directly through the central bank. Furthermore, CBDC can use new technologies such as distributed ledger technology (DLT), and is currently under consideration.

The motivation for introducing retail CBDC depends on how the three factors described in section 2 affect a specific area. Is cryptocurrency a threat to traditional payment means and can cause financial anxiety? Does physical cash are redundant and have the risk of losing trust in the currency system? Is it possible to make payment efficiency possible for retail and wholesalers?

The appearance of cryptocurrencies has been easier to access by eliminating intermediaries, and settlement and financial services are democratized. However, it has been proven that cryptocurrency fluctuates with a lot of price fluctuations (Demertzis and Martins, 2023).

In fact, the concern that cryptocurrencies may be destroyed for Soblin Money are now uneasy. That said, we don't have the same experience around the world, and of course the situation may change in the future. Support for extensive application of new technologies and innovation, reinforcement of business recovery and cyber security 3. Central banks around the world are trying this technology to determine which type of CBDC (retail and / or hall sale) provides added value to consumers and can cover the needs of consumers.

3.5 A mixed case for establishing a retail CBDC

In fact, the concern that cryptocurrencies may be destroyed for Soblin Money are now uneasy. That said, we don't have the same experience around the world, and of course the situation may change in the future. Supporting a wide range of applications for new technologies and innovation, strengthening business recovery and cyber security 3. Central banks around the world are trying this technology to determine which type of CBDC (retail and / or hall sale) provides added value to consumers and can cover the needs of consumers.

4 What is novel about wholesale CBDCs?

4.1 Improving wholesale payments

Although the scale of the cipher market is expanding, the ratio of the entire financial system is still small. According to the ECB, the value of all cryptocien assets by April 2022 will be less than 1%of the global financial assets (Panetta, 2022A). In addition, the proportion of the total payment is small. The Global Payment Report (FIS, 2023), the cryptocurrency is more often used for investment purposes than in the settlement methods (according to the survey, 77%of it), and electronic commercial transactions using cryptocurrencies. He pointed out that the payment amount is equivalent to 0. 19%of the world's electronic commercial transactions in 2022.

However, in Africa, Asia, and Latin America, cryptocurrencies play an increasingly active role. The index compiled by Chainalysis (2022) is trying to capture the overall image of cryptocurrency introduction by scoring countries with various indicators. According to the report, among the top 20 cryptocurrency introductions in 2022, only two hig h-income countries, the United States and the United Kingdom (Table 1).

Table 1:2022 World Cryptocurrency Introduction Index

Comprehensive index ranking

Country name

Comprehensive index ranking

Country name

Source Chain analysis (2022)

According to White and White (2022), Africa is the fastest growing cryptocurrency market. From 2020 to 2021, in Africa, cryptocurrency payments increased by 1, 200 %. The remittance, which is a very important source of income for the African continent, is greatly promoted by cryptocurrency (White and White, 2022). In Nigeria, 10. 3 % 5, the population, owned a cryptocurrency in 2022. The popularity of cryptocurrencies in Nigeria is explained by financial exclusion, which is lacking access to financial services. However, the slump in domestic currency and inflation are the reasons for the popularity currency. CBDC, at least in principle, will help reduce financial elimination, but that alone will not relieve doubts about the strength of the soblin currency.

The need for cash has decreased, especially during the spread of digital payments, especially during COVID-19 lockdown. Nevertheless, cash is still in charge of POS (Point of Sales), especially in later development areas, and will continue to exist in the future (BiS, 2023; FIS, 2023). )

4.2 From a dollar-centric system to bilateral settlements

According to data from the European Central Bank in the Euro area, cash payments at stores decrease from 79 % in 2016 to 59 % in 2022, but in lo w-priced transactions, cash is the most popular payment method. There is still something (Fig. 2 left). Citizen's opinion on the importance of having cash options indicates that there is no cas h-free society anywhere. The percentage of people who think cash is "very important" and "well important" exceeds 50 % in most countries in the Euro area (Figure 2, right panel). This goes against the theory that cash is no longer used.

Figure 2: Payment and cash importance in the euro area

Source: BRUEGEL based on ECB (2022).

Zamora-Pérez et al (2022) argues that the demand for cash has not decreased at the global level and is increasing. Despite many innovative solutions for no n-cash payments, this phenomenon has occurred. Some of the increased demand may be related to the motivation for preventive savings, a means of accumulating value in the lo w-interest rate over several years. In addition, even a country like Sweden, who tried to fully cashless, acknowledged that it may not be possible, even if it is limited, it is always necessary. ARMELIUS et al (2020) argues that Sweden is anomalous and may not be a trend setter on trends in cashless society.

Nevertheless, it is important to recognize that the digitalization process means that the demand for cash cash continues to decrease. It is much more difficult to evaluate whether cash demand is completely eliminated or whether it will be stable at a low level like Sweden. One of the answers depends on how much the CBDC, which is the most digital value of cash, can take over the cash role of providing system anchors. The choice of CBDC design determines how close CBDC brings cash. Privacy and anonymity, the threshold for consumers to hold CBDC, the presence or absence of rewards are related to this point.

Perhaps the most persuasive debate in the introduction of retail CBDC will increase the financial inclusive. Therefore, it is not surprising that countries whose population has been excluded from financial services first introduced digita l-style sel f-country currency.

For example, Nigeria's e-Naira (electronic currency) (electronic currencies) is the end of 2021 with the aim of increasing remittance, promoting trade beyond borders, improving financial inclusiveness, improving government welfare benefits, and implementing financial policies. 8 started. It is especially important to provide local people with digital payments and promote transactions across borders in the form of remittance through it. Figure 3 shows the level of global financial inclusiveness.

Fig. 3: Financial wrapping, three indicators

Source: Bruegel based on global Findex Database 2021. Note JP = Japan, AUS = Australia, NZ = New Zealand.

Developed countries such as Euro countries, the United States, and Canada have a very high level of financial inclusiveness. This does not apply to African countries and Caribbean countries where CBDC has already been introduced. However, CBDC alone is not enough to reduce financial elimination. In order for CBDC to be widely adopted, a wide range of access to the Internet connection is required, consumers need to have a mobile phone, and merchants invest in facilities to accept CBDC payments. I need to be. Figure 4 shows that many of the African population can access mobile phones, while the Internet is not so popular (50 %).

Figure 4: Digital infrastructure and penetration rate

Source: Bruegel based on global Findex Database 2021.

5 A digital euro: design options and its future

5.1 The ECB’s thinking so far

It is noteworthy that the introduction of CBDC is not necessarily the only or the easiest way to improve the financial entry, as indicated by India and Brazil, even if there is digital access. UPI (Unified Payments Interface), which was officially launched in 2016, is an instant settlement system widely adopted in India. In response to the great success, UPI is looking for an agreement with other countries to enable overseas use. For example, Nigeria's e-Naira (electronic currency) aims to increase remittance, promote trade across borders, improve financial entry, welfare benefits, and implement monetary policy effects. 8 started at the end of 2021. It is especially important to provide local people with digital payments and promote transactions across borders in the form of remittance through it. Figure 3 shows the level of global financial inclusiveness.

Fig. 3: Financial wrapping, three indicators

Source: Bruegel based on global Findex Database 2021. Note JP = Japan, AUS = Australia, NZ = New Zealand.

Figure 4: Digital infrastructure and penetration rate

Source: Bruegel based on global Findex Database 2021.

It is noteworthy that the introduction of CBDC is not necessarily the only or the easiest way to improve the financial entry, as indicated by India and Brazil, even if there is digital access. UPI (Unified Payments Interface), which was officially launched in 2016, is an instant settlement system widely adopted in India. In response to the great success, UPI is looking for an agreement with other countries to enable overseas use. For example, Nigeria's e-Naira (electronic currency) (electronic currencies) is the end of 2021 with the aim of increasing remittance, promoting trade beyond borders, improving financial inclusiveness, improving government welfare benefits, and implementing financial policies. 8 started. It is especially important to provide local people with digital payments and promote transactions across borders in the form of remittance through it. Figure 3 shows the level of global financial inclusiveness.
Fig. 3: Financial wrapping, three indicators
Source: Bruegel based on global Findex Database 2021. Note JP = Japan, AUS = Australia, NZ = New Zealand.
Developed countries such as Euro countries, the United States, and Canada have a very high level of financial inclusiveness. This does not apply to African countries and Caribbean countries where CBDC has already been introduced. However, CBDC alone is not enough to reduce financial elimination. In order for CBDC to be widely adopted, a wide range of access to the Internet connection is required, consumers need to have a mobile phone, and merchants invest in facilities to accept CBDC payments. I need to be. Figure 4 shows that many of the African population can access mobile phones, while the Internet is not so popular (50 %).
Figure 4: Digital infrastructure and penetration rate
Source: Bruegel based on global Findex Database 2021.
It is noteworthy that the introduction of CBDC is not necessarily the only or the easiest way to improve the financial entry, as indicated by India and Brazil, even if there is digital access. UPI (Unified Payments Interface), which was officially launched in 2016, is an instant settlement system widely adopted in India. In response to the great success, UPI is looking for an agreement with other countries to enable overseas use.
Meanwhile, the Central Bank of Brazil launched a platform for real-time digital payments called PIX, which has been a huge success. Since its launch, the number of registered users has been steadily increasing, exceeding 137 million in May 202311. PIX does not require the exchange of personal information, and the payer simply enters the recipient's QR code, and payments are made at any time and at high speed. According to the 2023 Global Payments Report, the average fee for a PIX transaction is 0. 22% of the transaction cost, compared to 1% for debit cards and 2. 2% for credit cards. It is very difficult to make the case for the introduction of a retail CBDC that can provide more added value to consumers, explaining why the Central Bank of Brazil is interested in introducing a CBDC, mainly for wholesale purposes12.

It is true that digital currencies equivalent to sovereign currencies have only been around for less than two years. However, their adoption has not been as impressive as authorities had hoped. Table 2 shows the adoption status in three countries: Nigeria, the Bahamas, and China. Compared to the total amount of currency in circulation, CBDCs are very small, none of which exceed 0. 17% of the total.

5.2 Other advanced economies’ approaches to CBDCs

Table 2: CBDC Circulation

Value in December 2022

Nigerian e-Naira

5.3 The future of the digital euro

Bahamian Sand Dollar

Chinese e-Renminbi

CBDC in circulation

3 billion e-Naira

303, 785 Sand Dollar

13. 61 billion eCNY

Percentage of currency in circulation

0. 01%

0. 17%

0. 13%

Source Created by Bruegel based on the Central Bank of Nigeria, the Central Bank of the Bahamas, and the People's Bank of China.

There are big problems to overcome. At least two issues may be contributing to the low adoption rate of the Bahamas' CBDC, the Sand Dollar, which was introduced in October 2020. 13 First, the public confuses Sand Dollars with privately issued cryptocurrencies and cannot trust them immediately. Since the Bahamas-based FTX scandal, the public has become skeptical of digital currencies. Second, Sand Dollars are not readily accepted everywhere. Merchants do not have the proper facilities to accept Sand Dollars (which is also the reason for the e-Naira).

This raises interesting issues on how to increase the reception of the masses. From historical events, it can be seen that the statutory currency law is not enough to guarantee new currency acceptance (Lotz and Rocheteau, 2002). In the tw o-sided market, acceptability is not only supported by consumers, but also by merchants who need to invest in necessary facilities. It is shown that this is a disability. Zamora-Pérez et al (2022) needs to cope with the cost of building the necessary infrastructure to spread currency, so providing a status of legal currency is correct to promote the spread of currency. He revealed that it is not necessarily a means. However, Brazil's Pix Payment System indicates that only a specific private player will be able to create a sufficient network effect for such markets to rise. Similarly, Chinese public institutions are starting to pay for public servants in electronic source 14.

An important reason why the spread is not progressing is the lack of trust in the basic currency. Expressing currency in digital is not enough to gain trust. Access may be easier, but it is only a little help. This is an important factor in explaining the low E-Naira penetration rate in Nigeria. In Zimbabwe, an interesting experiment has been conducted in which authorities issue a token 16 supported by gold as a way to improve the credit of the country's currency Jimbabw e-dollar. Fixing currency to a trusted asset is one way to improve the stability and reputation of currency. However, it is very costly and ultimately lost trust. This is interesting how much this initiative can establish Jim's trust in CBDC. This raises an interesting problem about how to increase the reception of the masses. From historical events, it can be seen that the statutory currency law is not enough to guarantee new currency acceptance (Lotz and Rocheteau, 2002). In the tw o-sided market, acceptability is not only supported by consumers, but also by merchants who need to invest in necessary facilities. It is shown that this is a disability. Zamora-Pérez et al (2022) needs to cope with the cost of building the necessary infrastructure to spread currency, so providing a status of legal currency is correct to promote the spread of currency. He revealed that it is not necessarily a means. However, Brazil's Pix Payment System indicates that only a specific private player will be able to create a sufficient network effect for such markets to rise. Similarly, Chinese public institutions are starting to pay for public servants in electronic source 14.

An important reason why the spread is not progressing is the lack of trust in the basic currency. Expressing currency in digital is not enough to gain trust. Access may be easier, but it is only a little help. This is an important factor in explaining the low E-Naira penetration rate in Nigeria. In Zimbabwe, an interesting experiment has been conducted in which authorities issue a token 16 supported by gold as a way to improve the credit of the country's currency Jimbabw e-dollar. Fixing currency to a trusted asset is one way to improve the stability and reputation of currency. However, it is very costly and ultimately lost trust. This is interesting how much this initiative can establish Jim's trust in CBDC. This raises interesting issues on how to increase the reception of the masses. From historical events, it can be seen that the statutory currency law is not enough to guarantee new currency acceptance (Lotz and Rocheteau, 2002). In the tw o-sided market, acceptability is not only supported by consumers, but also by merchants who need to invest in necessary facilities. It is shown that this is a disability. Zamora-Pérez et al (2022) needs to cope with the cost of building the necessary infrastructure to spread currency, so providing a status of legal currency is correct to promote the spread of currency. He revealed that it is not necessarily a means. However, Brazil's Pix Payment System indicates that only a specific private player will be able to create a sufficient network effect for such markets to rise. Similarly, Chinese public institutions are starting to pay for public servants in electronic source 14.

So far, we have stated about regular discussions to justify retail CBDC and the experience of the country that decided to introduce CBDC. In the process of digitalization of payment, the CBDC case is not clear. Rather, in countries where CBDC is already operated, the general public still has insufficient understanding of the differences between CBDC and private cryptocurrency. The most convincing reason for supporting CBDC is the financial inclination. But that's why CBDC is not a solution alone. Other elements such as digital infrastructure must be available. Brazil's example shows that if digital infrastructure is available, there are other solutions for financial inclusiveness. The important thing is to find an effective way to create a network effect.

However, the only way to guarantee the deposit is not CBDC. If you adjust the regulation, you can do this immediately. The important thing is that the system in which deposits are transferred from private banks to central banks inevitably change the appearance of retail banking. This is never a motivation for the introduction of CBDC, and should not be processed as an unexpected result. We have described the discussions that are regularly conducted to justify the introduction of retail CBDC and the experience of the country that decided to introduce CBDC. In the process of digitalization of payment, the CBDC case is not clear. Rather, in countries where CBDC is already operated, the general public still has insufficient understanding of the differences between CBDC and private cryptocurrency. The most convincing reason for supporting CBDC is the financial inclination. But that's why CBDC is not a solution alone. Other elements such as digital infrastructure must be available. Brazil's example shows that if digital infrastructure is available, there are other solutions for financial inclusiveness. The important thing is to find an effective way to create a network effect.

However, the only way to guarantee the deposit is not CBDC. If you adjust the regulation, you can do this immediately. The important thing is that the system in which deposits are transferred from private banks to central banks inevitably change the appearance of retail banking. This is never a motivation for the introduction of CBDC, and should not be processed as an unexpected result. So far, we have stated about regular discussions to justify retail CBDC and the experience of the country that decided to introduce CBDC. In the process of digitalization of payment, the CBDC case is not clear. Rather, in countries where CBDC is already operated, the general public still has insufficient understanding of the differences between CBDC and private cryptocurrency. The most convincing reason for supporting CBDC is the financial inclination. But that's why CBDC is not a solution alone. Other elements such as digital infrastructure must be available. Brazil's example shows that if digital infrastructure is available, there are other solutions for financial inclusiveness. The important thing is to find an effective way to create a network effect.

The impact on the introduction of retail CBDC has not yet been researched. Piazzesi and Schneider (2022) suggested that the emergence of digital currency could distort the competitiveness of the payment system. This is important in the areas where there are many other available private payments, such as the euro area. CBDC may hinder useful innovation in the private market, and thus reduces welfare as a whole. On the other hand, Williamson (2022) has a different view. CBDC, which competes with private payment methods, attracts safety assets (deposits). He argued that this is a way for private banks to manage safety assets in a better and better way to improve their welfare compared to how to handle this stock. The theoretically, CBDC can be a method of avoiding the partial deposit guarantee system.’However, the only way to guarantee the deposit is not CBDC. If you adjust the regulation, you can do this immediately. The important thing is that the system in which deposits are transferred from private banks to central banks inevitably change the appearance of retail banking. This is never a motivation for the introduction of CBDC, and should not be processed as an unexpected result.

The introduction of retail CBDC remains an operation risk. How do deposits draw deposits from private banks and deposit them in the central bank? Is this possible at once, or will it attack a bank? Due to cyber security issues, there is no completely safe system. How does technology and the regulations applied to it ensure financial stability? Finally, there is an overwhelming evidence that consumers are concerned about privacy and anonymity (ECB, 2021; NOLL, 2023). Technology provided by the ledger may provide innovative solutions to many problems, but the legal framework behind CBDC is as reliable as the actual currency and its issuance. It is a thing. Digging currencies cannot solve the disadvantages of governance.

In the current system, the preparation of the central bank's bank, which is available for hole sale transactions, is already a form of central bank digital currency. In other words, the payers and the paid (bank) in the hall sale market already have an account at the Central Bank. In other words, unlike the retailed CBDC, the Hall Sale CBDC does not need to be made from zero. Rather, we use the latest technologies to do a hole sale transaction using distributed ledger technology (DLT).~The problem is whether this new technology will be more efficient in the domestic hall sale payment and the payment between Central Bank lines across borders.

For example, it is a rea l-time gross payment system, such as the Euro system in March 2023, a T2 that launched a TARGET2 system in March 2023, and the Fedwire Funds Service, which settled on the dolla r-building transaction. Both systems are operated by each central bank. T2 is already aimed at enhancing cost efficiency, enhancing cyber security, and optimizing fluidity by harmonizing and integrating various Target services. The Hall Sale Payment System is quite advanced in the EU and the United States, but both ECB and Fed are seeking how efficient and safe DLT is in domestic banking remittances. Introduction of Retail CBDC remains an operation risk. How do deposits draw deposits from private banks and deposit them in the central bank? Is this possible at once, or will it attack a bank? Due to cyber security issues, there is no completely safe system. How does technology and the regulations applied to it ensure financial stability? Finally, there is an overwhelming evidence that consumers are concerned about privacy and anonymity (ECB, 2021; NOLL, 2023). Technology provided by the ledger may provide innovative solutions to many problems, but the legal framework behind CBDC is as reliable as the actual currency and its issuance. It is a thing. Digging currencies cannot solve the disadvantages of governance.~In the current system, the preparation of the central bank's bank, which is available for hole sale transactions, is already a form of central bank digital currency. In other words, the payers and the paid (bank) in the hall sale market already have an account at the Central Bank. In other words, unlike the retailed CBDC, the Hall Sale CBDC does not need to be made from zero. Rather, we use the latest technologies to do a hole sale transaction using distributed ledger technology (DLT).

The problem is whether this new technology will be more efficient in the domestic hall sale payment and the payment between Central Bank lines across borders.

For example, it is a rea l-time gross payment system, such as the Euro system in March 2023, a T2 that launched a TARGET2 system in March 2023, and the Fedwire Funds Service, which settled on the dolla r-building transaction. Both systems are operated by each central bank. T2 is already aimed at enhancing cost efficiency, enhancing cyber security, and optimizing fluidity by harmonizing and integrating various Target services. The Hall Sale Payment System is quite advanced in the EU and the United States, but both ECB and Fed are seeking how efficient and safe DLT is in domestic banking remittances. The introduction of retail CBDC remains an operation risk. How do deposits draw deposits from private banks and deposit them in the central bank? Is this possible at once, or will it attack a bank? Due to cyber security issues, there is no completely safe system. How does technology and the regulations applied to it ensure financial stability? Finally, there is an overwhelming evidence that consumers are concerned about privacy and anonymity (ECB, 2021; NOLL, 2023). Technology provided by the ledger may provide innovative solutions to many problems, but the legal framework behind CBDC is as reliable as the actual currency and its issuance. It is a thing. Digging currencies cannot solve the disadvantages of governance.

The problem is whether this new technology will be more efficient in the domestic hall sale payment and the payment between Central Bank lines across borders.

However, it is in cross-border and cross-currency transactions where DLT could bring significant benefits. These transactions suffer from inefficiencies associated with the current correspondent banking architecture (Hebert et al, 2023). International payment systems have not kept up with the scale of cross-border financial flows in an increasingly open world. The systems used are costly, slow, and complex, leaving many participants in emerging markets and developing countries without access to the global financial system. The need to improve cross-border payments in an increasingly interconnected world has been set as a priority for the G20, with the Financial Stability Board leading the coordination of the effort. 19 .

BIS (2021) shows the potential benefits that can be derived from new ways of cross-border payments. Table 3 summarizes the results of such a comparison. Transactions that currently take 3-5 days could be completed in less than 10 seconds. Cost savings would also be significant, but their magnitude would vary across banks and regions. For example, the cost of cross-border transactions averages 2% in Europe, but as much as 7% in Latin America. New payment solutions currently under consideration could reduce this cost to 1%. This reduction would be achieved by removing the correspondent banking network from the transaction chain and instead establishing direct corridors through which central banks can communicate.~Table 3: Efficiency gains from DLT compared to current payment systems

Current payment system

New payment technology

Transaction time

Cost

Accessibility~Via corresponding banks

Source Bruegel based on BIS (2021).

The Hong Kong Finance Management Bureau, the Central Bank of Thailand, the Central Bank of Japan, the People's Bank of China, and the BiS Innovation Hub Hong Kong Center participated in the MBRIDGES (BiS, 2022), which has achieved this efficiency. It was done. In this project using the DLT, a mult i-CBDC platform that allows market participants to make direct borders by using central bank funds. The project has demonstrated the ability to reduce payment risks and to enable local currency for international payments, along with improving efficiency and costs. However, this test operation was forced to make some complicated choices.

The International Financial System has long rely on the dollar, which means that it must depend on the dollar payment system. Figure 5 explains the current system of economic exchange between any two countries. When a Payer A, a company A, instructs the bank to pay, the bank will contact Corles Bank. Corres' Bank contacts Corles Bank B, and Corres Bank in Corres will contact the recipient's bank and complete the cycle of depositing payments in the recipient's account.~Figure 5: Dollar (Euro) -based international financial system

BRUEGEL based on the source BIS (2022).

Hall Sale CBDC will change this system. You will have a dedicated Corido (like an M bridge mentioned above) where the central banks make direct payments. Corles banks are no longer needed. The paid bank has an account directly to the central bank in that country, and the central bank will contact the central bank of the recipient. This means the diversification of the currency pair, and the liquidity of the uncolorable currency pair is increased. Also, if the relationship between the parties becomes more direct, it will also avoid the risk of transactions. Hong Kong Finance Management Bureau, Thai Central Bank, Central Bank of Japan, Bank of China, and BiS Innovation Hong Hong Kong Center participated in the pilot project called MBIDGES (BiS, 2022). The conversion has been achieved. In this project using the DLT, a mult i-CBDC platform that allows market participants to make direct borders by using central bank funds. The project has demonstrated the ability to reduce payment risks and to enable local currency for international payments, along with improving efficiency and costs. However, this test operation was forced to make some complicated choices.

Figure 5: Dollar (Euro) -based international financial system

BRUEGEL based on the source BIS (2022).

Depending on the currency where the exchange rate is conducted, each central bank is involved. It is important that the dollar is overwhelmingly the main currency (Moronoti, (Moronoti), which is overwhelmingly the main currency in the issuance of trade invoices (more than half of global trade) and foreign exchange transactions (almost 90 % of the total transactions). 2022). This also means that US settlement authorities are involved in the final decision of most global transactions.~Hall Sale CBDC will change this system. You will have a dedicated Corido (like an M bridge mentioned above) where the central banks make direct payments. Corles banks are no longer needed. The paid bank has an account directly to the central bank in that country, and the central bank will contact the central bank of the recipient. This means the diversification of the currency pair, and the liquidity of the uncolorable currency pair is increased. Also, if the relationship between the parties becomes more direct, it will also avoid the risk of transactions. The Hong Kong Finance Management Bureau, the Central Bank of Thailand, the Central Bank of Japan, the People's Bank of China, and the BiS Innovation Hub Hong Kong Center participated in the MBRIDGES (BiS, 2022), which has achieved this efficiency. It was done. In this project using the DLT, a mult i-CBDC platform that allows market participants to make direct borders by using central bank funds. The project has demonstrated the ability to reduce payment risks and to enable local currency for international payments, along with improving efficiency and costs. However, this test operation was forced to make some complicated choices.

Figure 5: Dollar (Euro) -based international financial system

BRUEGEL based on the source BIS (2022).

About the authors

Maria Demertzis

Catarina Martins

Figure 6: Commercial Bank CBDC Account at Central Bank

The digital euro can strengthen financial stability, with limits

A payer bank can make a payment to a payee bank in one of three ways (Figure 6). First, it can hold the domestic currency in an account at the domestic central bank, in which case the two central banks will transact using a pre-agreed currency. Second, the paying bank can hold an account in the foreign central bank in its own currency and make the payment in its own currency. Third, the paying bank can hold an account in the foreign central bank in its own currency and make the payment through that account.

Authors

Rhys Bidder

Tim Jackson

Matthias Rottner

A dedicated corridor between central banks would allow the settlement of any transaction. mBridge pilot tests showed that the third method is the most efficient.

A key problem that DLT solves is interoperability. Current systems do not ensure interoperability, since they require communication through secure messages. If countries use different systems, there is a risk that they will not be able to communicate with each other. Blockchain20 technology has provided a solution that allows parties to communicate through corridors. However, before such a dedicated corridor can be created, many choices need to be made on technical, legal (and governance), and economic issues.

For the system to work, established rules are needed to provide legal certainty. Will the current rules on holding foreign securities be sufficient for a wholesale CBDC, or will a new legal framework be needed? Global coordination on this issue would be desirable and indeed necessary for a wholesale CBDC to challenge the current way international transactions are settled. Arguably, governance of a wholesale CBDC will be the most important obstacle preventing its widespread adoption.

German households appear ‘open’ to the digital euro

However, bilateral legal recognition would be sufficient to settle transactions between two central banks. Wholesale CBDCs have the potential to transform the current dollar-based system into a more diverse one. It is not immediately clear why two countries that trade in dollars would prefer to trade in their own currencies. But if one of them were to be sanctioned by the United States, for example, the dollar would no longer be available. A payment system that could operate between any two central banks would ensure the continuity of economic activity. The existence of alternative payment systems does not automatically make the dollar less attractive as a currency of choice, but it does lower the threshold for using other currencies. There is no doubt that many countries looking to strengthen their resilience are considering the geopolitical importance of ensuring that their payment systems are functioning. It is no coincidence that many central banks, including China, are rushing to develop digital currencies that are equivalent to their national currencies. It is not difficult to imagine that CBDCs could be weaponized for geopolitical reasons, as central bank foreign exchange reserves have been since Russia's invasion of Ukraine. 21 However, many questions remain. On the governance side, choices must be made on issues such as data privacy, preservation of anonymity, monetary sovereignty, and dispute resolution. mBridges pilots have shown that when foreign companies transact domestically, the most efficient way to settle is to have an account at the domestic central bank. What about monetary sovereignty then? How will potential conflicts be resolved? Similarly, economic issues must be decided. How will countries deal with counterparty risk? Would domestic central banks agree to bear that risk on behalf of foreign financial institutions?

The Eurosystem is considering the introduction of a digital euro. The digital euro project is in the exploration phase at the time of writing, and will finish in October 2023. Three progress reports have been published so far (Box 1).

The first progress report released in September 2022 focused on the functions and restrictions for users. The report concludes that consumers should be able to pay online and offline in digital Euro, and that digital Euro should imitate the functions that are as close as possible. Privacy should be secured, but digital euros are not completely anonymized due to concerns about money laundering (fund cleaning). In addition, it is dedicated to payment and is not used for investment. This choice also reflects consideration for financial stability, and is especially important to prevent excessive movement of bank deposits, which can confuse the current financial system, to the central bank. For this reason, personal ownership should be limited from 3000 euros to 4000 euros (Panetta, 2022B).

In the second progress report released in December 2022, the focus is on defining the role of settlement and distribution and securing easy conversion between digital Euro and cash / private currency. I was. The Euro System intends to maintain the complete management rights for the issuance, redeeming and settlement of digital euros, but has not determined the technologies (conventional, DLT, or combination of both). Direct exchanges between distribution and end users are responsible for banks and other payment service providers. Banks and other settlement services will develop interfaces and services such as wallets and regularly check out money laundering prevention. In the third progress report (April 2023), payments include, for example, no n-contact type or QR codes, in accordance with any of the existing apps or Euro systems apps, according to the user's wishes. It has been clarified that it will be done using technologies that are already familiar to most European citizens.

The April 2023 report also discussed the possibility of access to residents other than the Euro area. However, the main focus of the first release of Digital Euro is the Eur o-zone residents (individuals, merchants, governments). Access of residents in the European Economic Area (EEA) and specific third countries may be assumed in the release of the digital Euro. The last important point I pointed out in this report is that digital Euro is not a programmable currency. In other words, the ECB does not determine where and when, when, when, and do not interfere.

Examining the financial stability implications of the digital euro

Early in late 2023, the Euro System plans to announce an overall idea of digital Euro design methods. Box 1 summarizes the way of thinking so far.

Box 1: ECB concept of retail digital Euro

A digital euro holding limit increases financial stability and welfare

Target user residents (individuals, merchants, government). There is a possibility of expanding access to no n-residents.

Purpose: Payment method, not investment (avoid excessive movement to bank deposits to central bank). There is no reward.

Possibility: Both online and offline solutions are assumed.

Notes : This figure shows the impact of the holding limit on financial stability and welfare. Left panel shows how the annualised run probability (financial stability criterion) in the economy (blue line) varies with the holding limit. Right panel shows how welfare measured as changes in consumption equivalents compared to an economy without the digital euro (red line).

Conclusion

Limited amount: 1. 5 trillion euros in total, 1. 5 trillion euros, or about 3, 000 to 4, 000 euros per citizen. The limit is applied to the individual, and individuals can only have one account. Mercile stores do not have digital euros, but they pay digital Euro.

Privacy: Digital Euro should reproduce as much cas h-like functions as possible, but is not completely anonymous. For lo w-cost payments, higher privacy may be secured.

References

Issuance and payment: Responsibility for the Euro system. Digital Euro is directly responsible for the central bank (on e-o n-one with the euro).

Onboarding, distribution, service: Responsibilities for banks and other payment service providers (supervised financial intermediary agencies). These can be conducted o n-boarding procedures (such as money laundering prevention tests) to develop consumer services other than core essential functions.

Access and Use: Through the existing app provided by PSP or the Euro system app. Payment using technologies such as no n-contact type and QR code.

The ECB will also investigate the cros s-curency function as a way to improve the transparency and efficiency of cros s-border payments (G20 approved). This function can be implemented by ensuring interaction between digital euros and other CBDCs or dependence on common infrastructure that can host multiple CBDCs. Earlier in late 2023, the Euro System plans to announce an overall idea of digital Euro design methods. Box 1 summarizes the way of thinking so far.

Box 1: ECB concept of retail digital Euro

Target user residents (individuals, merchants, government). There is a possibility of expanding access to no n-residents.

Elim Poon - Journalist, Creative Writer

Last modified: 27.08.2024

Currently the proposed legislation imposes a cash-like zero interest rate on the digital euro and foresees holding limits to minimise its use as. A limit of €3, (about £2,/$3,) per person has been mooted in the past as a digital euro holding limit. This is lower than UK. My colleague Juan M. and I reflect on the rationale behind the digital euro holding limits (and holding limits for CBDCs more in general).

Play

accepted