EU Council Backs Digital Euro with Holding Limits to Protect Banks

The Council of the European Union, the EU body responsible for amending legislation and obliging national governments to adopt EU laws, announced on Friday its backing of the European Central Bank (ECB)’s initiative to explore an official digital currency, known as the digital euro. The Council described this initiative as an evolution of money and a measure to enhance financial inclusion.

However, the Council emphasized that the ECB must establish limits on the total value that can be held in digital wallets and online accounts at any moment. This measure aims to “avoid the digital euro being used as a store of value,” which would otherwise risk affecting financial stability.

The Council consists of government ministers from the 27 EU countries and shares lawmaking responsibilities with the European Parliament. Its endorsement signals widespread support among national governments for the ECB’s digital euro design, enhancing the likelihood that upcoming legislation will align with the ECB’s framework.

Experts highlight that the holding limits serve to prevent digital euros from competing directly with conventional bank deposits. According to Edwin Mata, CEO of tokenization platform Bricken, the limits help stop a swift transfer of deposits from commercial banks to the ECB during financial stress, which could accelerate bank runs.

Similar concerns about stablecoins, such as the dollar-pegged assets Tether‘s USDT and Circle Internet’s USDC, have been voiced by the ECB. Officials warn that rapid growth in stablecoins might trigger retail deposit withdrawals, reducing a key funding source for banks and increasing funding volatility.

The ECB’s concern focuses on the potential impact on commercial banks, which create most money via lending. Pedro Birman, CEO of Quadra Trade, explained that unrestricted digital euro holdings could shrink banks’ deposit bases, constrain credit creation, and raise banks’ funding costs, acting as unintentional monetary tightening during crises.

These caps are considered critical to ensure the digital euro functions mainly as a payment system rather than a store of value or balance sheet, preserving monetary policy effectiveness. Amber Ghaddar, founder of The 200Bn Club and Nexera, noted such limits prevent weakening of monetary policy transmission and help maintain ECB control over interest rates.

Some analysts, including Jonatan Randin of PrimeXBT, argue that while financial stability is cited, the limits also protect banks from new digital currency competition, as a digital euro without restrictions would offer a risk-free alternative to bank deposits. A study by Copenhagen Economics suggested these changes could reduce banks’ net interest income by 7% on average and up to 13% for smaller banks.

The debate reflects a balance between providing a trusted digital payment option and maintaining the existing financial system. The ECB and EU policymakers view holding limits as necessary safeguards, while critics see them as potentially limiting the digital euro’s utility and protecting incumbent banks.

For more information on the digital euro and its development, refer to the ECB’s official page.

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