Morgan Stanley has a note out on the digital euro, the European Central Bank’s grasp to retain monetary sovereignty in an increasingly paperless union.
Work on a eurozone Central Bank Digital Currency began in earnest in November, with two years allocated for the preparation phase. There’s a lengthy Q&A on the ECB website explaining what we’re going to call ECBitcoin will and won’t be, which includes lots of reassurances about inclusivity and privacy protection and not much on its potential to accelerate bank runs: The ECB will minimise any potential threat a digital euro may pose to the financial system.
Thus, the amount of digital euro that users can hold in their accounts will be limited to prevent outflows of bank deposits, even in times of crisis. Allowing depositors to switch to a CBDC wallet on the first whiff of panic creates a risk-free, frictionless way to drain a banking system of stable funding. Harsh capital controls would nullify the whole project. Finding the middle ground is tricky....
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