Digital Euros Might Have Penalties To Curb Financial Chaos, ECB Says

digital euro

European Central Bank (ECB) member Fabio Panetta says the digital euro could pass negative interests rates to customers, Bloomberg writes.

Panetta, speaking at an event on Wednesday (Feb. 10), said officials who wanted to prevent bank runs could make hoarding digital money an unattractive option through penalizing remuneration of holdings more than 3,000 euros.

The concern among many officials is that consumers, with the option of digital money available directly with the financial authority of a country, would then set about draining their bank accounts and cause fiscal instability.

According to Panetta, interest rates of -1 percent or -2 percent on a central bank digital currency might not provide much deterring for people to do so during acute shocks to the system. He said the system would have to incorporate “highly penalizing” tiered remuneration.

That said, he also acknowledge this system could go too far in the opposite direction.

“For example, in times of crisis it could be necessary to adjust the remuneration of the digital currency, but this could signal that the central bank is anticipating financial tensions, leading to self-fulfilling instability,” he said, according to Bloomberg.

The ECB is one of the biggest global banks looking into a digital currency. The bank and the European Commission have both begun working on the specifics of how one would be implemented. This comes as people have increasingly used digital methods of payment since the pandemic began. According to the ECB, a digital euro could help complement the physical currency and already-existing payment methods in the private sector.

The ECB is expected to decide by the middle of the year if it’s going to proceeds with the digital euro.

Thus far, only the ECB’s deposit facility is negative, Bloomberg writes, which discourages banks from holding onto excess liquidity and helps to boost lending. Not many banks in the area have passed on that charge to customers — any such move could provoke heavy criticism.