In a growing dispute, several European Union (EU) member states, including Germany, France, the Netherlands, and six others, are voicing their apprehensions regarding the European Central Bank’s (ECB) authority to determine holding limits for the proposed digital euro central bank digital currency (CBDC). This concern stems from fears that the ECB may impose excessively high limits, potentially leading to a significant outflow of deposits from traditional banks.
Concerns Over ECB’s Authority
Diplomats have described the situation as a “battle for power” between central banks and politicians. There is widespread worry that imposing holding limits might be perceived as an infringement on financial freedoms, with critics labeling it a “Big Brother” approach. Moreover, there are doubts about whether the digital euro will align with consumer needs, risking lower adoption rates among the public.
While the EU treaty grants the ECB certain privileges, the digital euro will be governed by its own legislation, which is still pending. Ahead of recent European elections, several amendments were proposed to the initial draft, revealing that nine countries opposed the ECB’s unilateral decision-making on wallet holding limits.
The ECB contends that establishing these limits is crucial for shielding its decisions from political influence.
Implementation of Digital Euro Holding Limits
There are essential considerations regarding the practical implementation of holding limits for the digital euro. The primary aim of the digital euro is to establish a unified European payment system that can compete with major non-European players like Visa and Mastercard. Although the Single Euro Payments Area (SEPA) operates on a pan-European basis, it serves as a backend solution. Therefore, it seems logical that a uniform holding limit for the entire EU block should be established.
If the ECB is not permitted to set these limits, the question arises: how would such a system function in practice? Would it require an annual vote to establish limits?
Managing Excess Funds
The implementation of holding limits poses additional complexities. For example, if a digital euro wallet has a holding limit of €3,000 and a user receives additional funds that exceed this limit, any surplus would automatically transfer to a bank account. Conversely, if a user attempts to make a payment but lacks sufficient digital euros, funds could be pulled directly from their connected bank account. This mechanism is referred to as the waterfall and reverse waterfall functions.
This setup has several implications. Many users prefer to track their spending effectively. Frequent transfers between their bank account and digital euro wallet could complicate this tracking process, resulting in a lack of visibility that may facilitate fraudulent activities.
While a CBDC like the digital euro promises efficient payment processes, the waterfall and reverse waterfall methods may create multiple transaction legs. For instance, if a sender lacks sufficient funds, money is pulled from their bank; then, the CBDC payment occurs; and finally, if the recipient exceeds their wallet limit, the excess funds are swept into their bank account. As such, several countries argue that there will be increased pressure to establish higher limits to minimize the reliance on these functionalities.
Legislative Debates and Future Considerations
Recent legislative proposals have suggested that banks and payment providers should be allowed to set their own limits. A digital euro report from the Dutch central bank emphasized the importance of holding limits, particularly during the transitional phase. A study commissioned by the European Banking Federation estimated that a €3,000 limit, with a 40% adoption rate, could raise bank funding costs by €8.8 billion.
In response to these concerns, the ECB has stated that it would determine holding limits based on the economic context at the time of the launch. One of its current tasks involves developing a methodology for setting these limits.
