ECB Proposes Tiered Interest Rates To Control Digital Currency Volumes

Digital currencies, yes – but with limits.

According to a paper that debuted this week from the European Central Bank (ECB), central bank currencies in digital form have their uses, but individuals should be dissuaded from holding too much of a hypothetical digital euro.

The paper, titled “Tiered CBDC and the Financial System” and bylined by Ulrich Bindseil, the ECB’s director general of market infrastructure and payments, notes that there are advantages and disadvantages to central bank digital currencies (CBDC), tied in part to retail payments.

But, as noted, the issuance CBDC should be done in a way that allows the ECB to “control volume” of those currencies.

According to the paper, it is “essential to be able to steer the issuance of CBDC in such a way that it serves the efficiency of retail payments, without necessarily putting into question the monetary order by making CBDC a major form of store of value.”

To help address the two separate functions, Bindseil writes that the proposed “steering” can be done through a tiered interest rate structure. This “rather simple solution – tiered remuneration – can solve the problem of quantitative control and thus of undue bank disintermediation. At the same time, this solution allows the central bank to commit to never applying negative rates on an amount of CBDC that seems sufficient to allow CBDC to play a key role in payments,” according to the paper.

And in proposing the tiered structure, there would be “unattractive” rates on holdings above a certain level. “If the remuneration rate for tier-two deposits is sufficiently unattractive, then the amount of such deposits should be low, or even zero,” according to Bindseil.

The implication, then, seems to be that holders would not favor digital holdings over traditional fiat, or use the digital option to make a run on banks. (Thus, a structural risk for disintermediation, if individuals opted to keep a significant percentage of their deposits in digital form, might be neutralized.)

The tiered structure does exist for central bank deposits, according to the paper, in countries such as Japan and Denmark, though does not apply to CBDC (which, of course, do not exist yet). Negative interest rates would not be imposed on the payments “tier.”

Interestingly, Bindseil’s paper states that “it is acknowledged that solving the issue of risks of structural and cyclical bank disintermediation does not necessarily lead to the conclusion that there is a sufficient universal business case for CBDC.”

As has been widely reported, and noted in this space, the use cases for crypto have been slow to gain traction – so, as we contend, deterring the use as a store of value, and toward payments, would require the continued acceptance of merchants. As sites such as coinmap.com have reported, only several thousand merchants accept cryptos on-site across the globe.

As the volatility of cryptos continues (even for central banks’ digital currencies), this means retail payments might be slow-going.