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Keeping Bankers Happy Could Undermine Digital Euro Before Development Even Starts

Although the European Central Bank is still undertaking its investigative stages concerning a potential Euro-Zone CBDC, it already seems to be tying itself in knots trying to limit potential disruption to the status quo as far as commercial banks are concerned.

Bankers and CBDC

When it comes to central bank digital currencies, privacy rates as one the absolute top-requested features by users. When the European Central Bank undertook a public consultation on the potential digital Euro, 43% of respondents ranked privacy as the single most important aspect; significantly ahead of any other features.

It seems reasonable that, as a digital equivalent to cash, a Euro CBDC would have the same qualities, one of which being that cash is anonymous and private. And in a recent interview with German business newspaper, Handelsblatt, ECB Executive Board Member, Fabio Panetta, claimed, “We are designing the digital euro with the highest possible level of privacy. The ECB will have no access to personal data.”

So far, so good. The unbanked gain access to digital payment functionality, increasing financial inclusion across the Euro-zone, and not compromising on privacy. But a digital Euro that looked like this may be considered a bit too good… for consumers, at least.

With access to digital payments no longer requiring the services of an intermediary bank, there is no longer a compelling reason for the majority of consumers to maintain an account. In fact, Investopedia’s entry explaining CBDCs lists the elimination of third-party risks such as bank failures as one of the top issues that are addressed by them.

Investopedia also cites the value of eliminating the need for expensive infrastructure by establishing a direct connection between consumers and central banks. Unfortunately, these benefits are not part of the ECB’s vision for its potential CBDC. In the same Handelsblatt interview, Panetta states that:

“As with cash, we want to ensure that everybody in the euro area has easy access to the digital euro. To this end, we will work with supervised intermediaries such as banks, as they are best placed to interact with end users.”

In order to ensure that commercial banks aren’t an easily (and for many consumers preferably) bypassed element of a future digital Euro-ecosystem, the ECB are currently looking at two key mechanisms.

Firstly, regarding interest payments, whereby the ECB’s current position seems to suggest that payment of interest on digital Euro holdings is fairly likely. However, the central bank wishes to discourage the use of its CBDC for investment purposes, so this is likely to be a tiered system, with holdings above a certain threshold attracting ever lower rates of interest.

Although the second mechanism for protecting the current hegemony of the commercial banks makes this first point pretty much moot anyway. In its wisdom, as an attempt to maintain the digital Euro as purely a tool for payments, the ECB is suggesting that each individual’s holding could be limited to around €3,000.

Is there any need for a tiered interest rate on such a relatively low amount? Plus, in the current scenario payments received over the €3,000 limit would be automatically transferred to a nominated bank account, and big-ticket purchases above this limit must be either made in cash or using a bank account.

So if having a bank account, which inevitably already supports digital payments, is pretty much necessary anyway, then why does the European public need a digital Euro CBDC? And before you refer back to, “the ECB will have no access to personal data,” be aware that implementing such a limit on holdings will require accounts to undergo KYC procedures, thus compromising the privacy that 43% of potential users value more than any other feature of a potential CBDC.

The ECB argues that these mechanisms are also necessary to combat fraud and money laundering, but surely they should then try to impose a similar limit on cash holdings. And in any case, as the financial news cycle repeatedly shows, the overwhelming majority of money laundering is carried out through commercial banks.

It rather seems as though the ECB is putting the continued profitability of these private businesses and their shareholders above the stated desires of its users. If it continues to favor crippling the functionality of its CBDC to protect the interests of the commercial banks then it could easily make the digital Euro obsolete before it has even started active development. Our observations are to be continued...