Europe Central Bank Proposes ‘Unattractive’ Rates for Digital Currency

A working paper raises concerns about a run on the banks in times of financial instability, with tiered interest rates proposed as a solution.

The European Central Bank (ECB) remains open to the idea of a digital euro equivalent but would want to stop citizens holding too much of it. 

That was the conclusion of a fresh working paper on so-called central bank digital currencies (CBDCs) by Ulrich Bindseil, the bank’s Director General of Market Infrastructure and Payments, on Jan. 3. 

ECB would need to “control volume” of CBDC

The paper deals with the prospect of issuing a CBDC for the European Union, and also touches on the differences between such a currency and cryptocurrency stablecoins.

Its issuance comes as China edges closer to becoming the world’s first state to issue a CBDC. The ECB, like other major banks, has stayed risk-off on doing likewise, despite the potential disadvantages of not competing with Beijing.

For Bindseil, there are both benefits and disadvantages to issuing a European CBDC, and these should first be addressed before the EU entertains such a possibility.

Specifically, Bindseil proposes a two-tier interest rate system, which would offer “unattractive” rates to holdings above a certain threshold. This, he says, would reduce the likelihood of savers selling fiat for the CBDC in times of crisis.

The equivalent of a run on the banks, savers could potentially move funds out of the ECB’s jurisdiction much more easily than they could via the banking system under such circumstances.

“The well-tested tool of tiered remuneration seems to be a way to ensure that the volume of CBDC will be well-controlled,” he summarized.

ECB considers “preferences of money users”

Concluding, Bindseil nonetheless stopped short of recommending CBDC for the ECB:

“It is acknowledged that solving the issue of risks of structural and cyclical bank disintermediation does not necessarily lead to the conclusion that there is a sufficient universal business case for CBDC. The merits of adopting CBDC will depend on the preferences of money users and available payment alternatives.”

As Cointelegraph reported, China’s central bank has already been testing its CBDC with selected banks. A cryptocurrency law passed by Beijing in October entered into effect on Jan. 1. 

The notion of discouraging saving of money meanwhile is a practice Bitcoin (BTC) proponents routinely highlight as an example of the failure of the fiat currency system. As Saifedean Ammous notes in his popular book, “The Bitcoin Standard,” central banks require holders of fiat to spend and borrow, not save, in line with Keynesian economic policy. 

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