Digital Euro: An assessment of the first two progress reports The case for unlimited holdings of digital euros

Abstract

In summary, we strongly support the introduction of a digital euro that complements instead of replaces cash in the euro area. We reason that the key role of a digital euro consists of the important role it can play as a store of value option for the public. We argue that it can only fill this role if it truly represents an alternative to bank money, especially in times when financial markets are in turmoil, and if it eclipses the attraction of cryptocurrencies and stablecoins as supposed safe havens of store of value. We further advance the idea that all of this requires that the public’s access to a digital euro is unlimited. We thereby argue against the ECB’s assumption that an unlimited access to a digital euro would destabilise the financial system by suggesting that such unlimited access would in fact protect depositors, enhance central banks’ control over the liquidity provision for banks, and support competent authorities’ resolution efforts. We also advance the idea that some monetary policy operations could become more efficient with unlimited access to digital euros. A digital euro could in its first phase be capped to allow for its gradual introduction in phases which would help banks prepare for this new world of diversified and unrestricted store of value choices for everyone. However, after this initial phase (of two or three years), the cap should end. It follows from the above that a digital euro should either be introduced without any holding caps or further research projects analyse whether holding restrictions are justified. Only a detailed analysis of all expected negative consequences of unrestricted access to a digital euro for everyone and convincing arguments why they outweigh the benefits that only an unlimited version of a digital euro promises would provide such justification. In case that such justification ultimately argues in favour of holding caps, we recommend that the ECB explainsin concrete terms what objectives the Eurosystem would pursue with a digital euro that limits the holdings of digital euros to small amounts (e.g., to a few thousand euros at any time). Since the Eurosystem does not intend to replace cash with a digital euro, the benefits that would result from such limited access to digital euros are far from evident. Its store of value component would be negligible since it would not offer a safer alternative to bank money for amounts exceeding the cap. As a result, it would be unsuitable to rival the allureof cryptocurrencies and stablecoins. It could be understood as an alternative to existing cashless payment systems, but nothing in the research on CBDC published so far suggests that there are issues with the existing private payment services landscape in all or parts of the euro area. We therefore conclude that, from today’s perspective, a digital euro can only be considered a project worth pursuing if the Eurosystem (ideally cumulatively, but at least alternatively) 1) feels ready to design it as a safe store of value option for the public, 2) sees value in it for the resolution of a banking crisis, and/or 3) embraces it as a monetary policy instrument.