Yesterday, the European Central Bank (ECB) held a seminar with citizen group representatives to discuss the status of the digital euro. Topics included the Commission’s recent legislative proposal for the central bank digital currency (CBDC), that covers legal tender status, a high degree of privacy, and holding limits, amongst other issues. The ECB will decide in October whether to move forward with the development of the CBDC, which is not a launch decision.
CBDC holding limits
Questions about holding limits featured prominently throughout the Q&A session. Two participants asked about the criteria behind the €3,000 cap ($3,400) on digital euro holdings to understand how the central bank arrived at what many see as a restrictively low amount. However, the ECB representatives gave familiar answers concerning financial stability and deposit flight risk in case of crisis, adding that it might adjust the definitive number as we move closer to issuance.
Another person questioned why offline limits will be set by the European Commission and online caps set by the ECB. The offline version is more private and is seen as closer to cash. The response was that maximum physical cash payments limits are not set by the ECB but rather by national authorities because they entail a judgment of privacy versus anti-money laundering. Hence, a similar approach was chosen for the offline digital euro. The issue is seen more as a political question than an economic one, so it was left to the Commission to answer it.
Digital euro merchant fees
A question also surfaced regarding the current compensation model, which will involve merchants being charged by banks for accepting payments. The draft law requires the charge to be the same or less than other electronic payments. The ECB argued that even cash payments carry acceptance costs, such as charges for depositing it in the bank. Additionally, this will help to cover some of the costs incurred by banks including for know-your-customer and anti-money laundering (KYC/AML) checks .
Lastly, the issue of financial inclusion came up, with one participant asking how the ECB would ensure that private intermediaries guarantee universal access to the digital euro. After all, a 2014 directive established the right to a basic payment account regardless of a person’s place of residence or financial situation, but many customers are still denied access because banks do not see them as profitable.
To this end, the legislative proposal includes an obligation for every credit institution to provide their customers with digital euros on demand. However, that only covers existing bank customers. It also requires Member States to designate dedicated entities to enable access to the CBDC for unbanked individuals. These entities would perform the necessary KYC/AML background checks to ensure compliance with regulatory requirements. Our view is in many countries this entity will likely be the post office.