The European Central Bank’s (ECB) Director General of Market Infrastructure and Payments released a paper which describes how a European Central Bank Digital Currency (CBDC) would function. One of the key points is that if people held too much of the Euro CBDC they would be charged unattractive, i.e. highly negative interest rates, so that citizens could not hold too much of it.

Essentially, the ECB fears that if there is a run on the banks then customers would be able to easily transfer their fiat into the Euro CBDC, leading to unacceptable capital outflows from bank reserves, which could lead to bank collapses.

The proposed solution is that holding the CBDC above a certain threshold will involve highly negative interest rates, meaning that people’s CBDC would literally burn away, making it so people do not want too much of the CBDC. Basically, this would force citizens to keep their money as fiat in the bank rather than withdrawing it in the form of the Euro CBDC.

Europe is already infamous for its negative interest rates, with the ECB interest rate being -0.5% on deposits. This means that every year an account holding EUR 10,000 would lose 50 EUR, on top of an inflation rate of 9.5%. This means that every year 10,000 EUR loses 1,000 EUR of purchasing power, which adds up quick long term.

Therefore, holding fiat in the form of EUR in a bank is already highly unattractive. The ECB’s idea is to make the Euro CBDC even more unattractive, so that people will stick with fiat even if a banking crisis occurs.

Thus, if an official European CBDC ever does launch, it seems like it will not be a good thing.