The Council of the European Union, an EU body that changes legislation and commits national governments to adopting the bloc’s laws, said it supports the European Central Bank’s plan to explore an official digital currency, calling it an evolution of currency and a tool for financial inclusion.
In an article published on its website on Friday, however, the Council said the ECB will need to set limits on the total value that can be held at any time in online accounts and digital wallets to “avoid the digital euro being used as a store of value” to prevent it from having an impact on financial stability.
The Council includes ministers from the governments of the bloc’s 27 countries and shapes EU law with the European Parliament. Its approval signals broad national alignment around the central bank’s digital currency design, increasing the likelihood that upcoming legislation will reflect the ECB’s approach.
“Holding limits are not just about abstract financial stability,” Edwin Mata, co-founder and CEO of tokenization platform Bricken, told CoinDesk. “They aim to prevent the digital euro from directly competing with bank deposits. If people could hold an unlimited number of digital euros, deposits could flow instantly from commercial banks to the ECB, particularly during times of stress, thus accelerating bank runs.”
The ECB has warned of similar risks posed by stablecoins. Its officials pointed to dollar-pegged assets such as Tether’s USDT and Circle Internet’s (CRCL) USDC, warning that “significant growth in stablecoins could cause retail deposit outflows, diminishing an important source of funding for banks and leaving them with more volatile funding overall.”
Making sense of digital euro savings limits
The ECB’s concern goes beyond a vague “financial stability”, said Pedro Birman, CEO of Quadra Trade.
“In the euro system, most of the money is created by commercial banks through loans,” he said in an interview. “If digital euros could be held freely as a store of value, a large-scale migration of bank deposits to the ECB’s self-depository money would reduce banks’ deposit base. This would directly limit credit creation, increase banks’ funding costs and act as an unintended monetary tightening, particularly in times of stress.”
This concern is shared by others who view caps as a necessary design tool to protect the balance of the financial system.
“The message is clear: the digital euro is designed as a payment system, not a balance sheet, and the caps are there to ensure it never becomes that,” said Amber Ghaddar, founder and CEO of 200Bn Club and Nexera.
Large digital euro balances would also risk weakening monetary policy transmission, potentially forcing the ECB to make difficult decisions, such as whether to pay interest on the central bank’s retail currency or accept reduced control over interest rates, Ghaddar said.
Protecting banks from competition
Yet others remain skeptical. While the ECB structures its policy around financial stability, it also has the effect of protecting banks from new forms of competition, said Jonatan Randin, senior market analyst at PrimeXBT.
He highlighted ECB analysis published in February 2024 that holding limits are designed to preserve the economic function of commercial banks and protect the deposit base of businesses. A study by Copenhagen Economics estimates that such a measure could reduce banks’ net interest income by 7% on average, and by up to 13% for smaller lenders.
“Banks profit from holding customer deposits and lending that money,” Randin said. “A digital euro without strict limits would offer citizens a risk-free alternative, reducing banks’ access to cheap financing.”
Arthur Breitman, founder of the Tezos blockchain, made a similar point. He explained that the measure aims to prevent a sudden flight of commercial bank deposits into what would effectively be risk-free central bank money. While this protects banks’ financing models, he added, it also reflects how much the current system relies on commercial banks to provide credit.
Charles d’Haussy, CEO of the dYdX Foundation, highlighted the contrast between global approaches. “Europe is strongly committed to a sovereign digital CBDC, which is the digital euro, to maintain monetary control and privacy within a fully regulated framework,” he said. “Much of the rest of the world, particularly the United States and dollar-centric regions, favors private stablecoins because of their speed, innovation, and global scale. »
Ultimately, the debate reflects a tension at the heart of central bank digital currency design: how to offer the public a reliable and modern payment tool without undermining the already existing financial system. The ECB and EU policymakers view maintaining limits as a necessary safeguard to maintain this balance. Critics, meanwhile, warn that these same limits could limit the usefulness of the digital euro and protect incumbents from significant competition.
Read more: ECB’s Christine Lagarde focuses on digital euro rollout after holding rates
