Importance of holding limits for the digital euro and other central bank digital currencies

Research at the University of Liverpool on central bank digital currencies (CBDCs) is helping shape the design of the forthcoming digital euro, by investigating its impact on bank stability and its potential to facilitate bank runs.

Background

The use of physical cash has been declining for some time, hastened by the COVID-19 pandemic. The majority of payments are digital transactions tied to people’s bank accounts. Cash cannot be used for online payments or in any place that requires touch-payments only (using cards, phones or QR codes).

CBDCs are a proposed form of digital cash designed exactly to fill this technological gap. Think of cash that can be used digitally to make online payments or that can be connected to a card or your phone to make payments with.

Unlike cryptocurrencies or stablecoins, CBDCs will be provided by governments in a similar way cash is. Their price does not vary like Bitcoin, nor is there any cryptographic or environmental concerns. It's simply an updated form of cash for the digital age.

CBDCs are no longer a theoretical exercise. The digital euro has concluded its preparation phase and moved to the technical readiness phase in October 2025, demonstrating extensive progress on this project.

Our research

Research by Dr Tim Jackson and colleagues Dr Rhys Bidder (King's College London) and Dr Matthias Rottner (German Bundesbank), focuses on the impact of the digital euro on banks and the wider macroeconomy. Specifically on financial stability and the extent to which a new digital alternative will facilitate bank runs.

Currently, if you're afraid your bank is no longer safe, you must run to one of their branches and withdraw cash before they close the doors. A digital euro makes this much easier, since clients you can do this from the comfort of your living room. As a digital euro can make runs more likely, the merest rumour that a bank is unsafe may lead many depositors running to their phones to make withdrawals.

To test this hypothesis, they surveyed 5000 German households and found overall they liked the idea of the digital euro, despite many not having heard of it before. While the majority still preferred to hold cash (tried, tested and true), the results show that when is up-and-running and advertised, the digital euro will indeed have an impact on the payment sphere.

The survey also revealed many German households want to hold digital euro in normal times, just to make payments with it and outside of bank run scenarios. Germans are famously cash-loving. They tend to hold more cash than most countries in the Eurozone, particularly due to a cultural preference for budgeting with cash which means many withdraw the money they need at the beginning of the month and survive spending only this.

The investigation suggests this love for cash extends to its digital version. However, importantly for the analysis, some of the potential digital euro demand indicated in the survey also came as a substitution for bank deposits, and would therefore compete with them.

Thus, the digital euro interacts with bank deposits in two ways, which the researchers refer to as:

• Fast disintermediation - It makes bank runs more likely as households can switch to digital euro quickly and easily if they're afraid
• Slow disintermediation - Some households prefer to use digital euro to make payments instead of private bank accounts, taking funds away from the banking sector.

They've considered both channels in a macroeconomic model of the euro area to quantify their effects, and found that while fast disintermediation is damaging to financial stability, slow disintermediation actually improves it by creating competition for banks. This is because the presence of a safe digital euro alternative leads banks to behave less riskily - particularly by borrowing less - leading to a reduced likelihood of a banking crisis.

However, for all reasonable calibrations fast disintermediation dominates, as making much easier for depositors pull their money worsens the odds of a bank run.

The researchers offer a simple solution to this issue by limit the amount of digital euro households can hold. This allows them to spend in normal times – offering competition for banks – while preventing them from pulling out their funds every time a rumour of bank instability whirls around the internet. The model suggests a limit of limit of 1,750€ would prevent damaging fast disintermediation, while preserving the benefits of digital euro as a competitor for banks.

The impact

The President of the German Bundesbank, Joachim Nagel, referenced this research when discussing the impact of the digital euro on financial stability in June 2024.

Additionally, their paper "CBDC and banks: Disintermediating fast and slow" has been invited to a revise and resubmit in one of the top 3 journals in finance, while Dr Jackson and colleagues continue to discuss closely with decisionmakers at the European Central Bank, and are cited widely.