Core Focus: The safeguards designed to mitigate the risk of bank disintermediation, including individual holding limits, the prohibition of interest, and the reverse waterfall mechanism.

In-Depth Notes:
The greatest concern with a retail CBDC is the risk of bank disintermediation. If a significant portion of the public shifts deposits from commercial banks to the digital euro, banks’ funding bases could shrink, reducing lending capacity and increasing reliance on volatile funding sources . To mitigate this risk, the digital euro design incorporates a suite of safeguards .

Holding Limits:
Individual holdings of the digital euro would be capped to prevent the currency from being used as a store of value and to protect financial stability . Both the Parliament and Council agree that individual holdings need to be capped, but they disagree on who gets to set that cap . The Parliament proposes that the Commission set the overall ceiling by delegated act, informed by an ECB recommendation . The Council prefers the ceiling to be set through a Council implementing decision, adopted by reinforced qualified majority and based on an ECB recommendation . The two sides also differ on how legal persons are treated: the Parliament would write a near-total prohibition on legal persons holding digital euro into the regulation, while the Council suggests leaving the details to the ECB . The ceiling is expected to be reviewed at least every two years .

Zero Remuneration:
The digital euro would not pay or charge interest . This ensures that it is not an attractive investment vehicle, reducing the risk of large deposit outflows from commercial banks.

The Reverse Waterfall Mechanism:
The payment function without actual holdings in digital euro—the so-called “reverse waterfall mechanism”—would limit the shift of commercial bank deposits to digital euro and thus mitigate the risk of bank disintermediation, protecting financial stability and the provision of credit by commercial banks . The mechanism allows payments to be completed even if a user’s digital euro balance is insufficient, by automatically “defunding” from a linked bank account.

The Legislative Position on Business Holdings:
To further protect financial stability, businesses would be barred from holding digital euros, except to accumulate incoming payments for up to 24 hours . This ensures that the digital euro remains a payment instrument rather than a store of value.