CBDC as a store of value threatens financial system, says German official

Burkhard Balz, a German politician and executive board member of the country's central bank, said in a speech on Oct. 20 that it was crucial to build tools to restrict how the digital euro is used upon launch.

Balz emphasized that people should only be able to use the central bank-backed digital euro as a mode of payment and not as a store of value.

If the central bank digital currency has the same characteristics as traditional money, depositors could withdraw their funds in times of a crisis by converting it into digital euros, making the funds a liability for the central bank.

"This might lead to the structural disintermediation of the banking sector and, as a consequence, could potentially dampen the provision of bank credit to the economy," Balz warned.

As a measure to prevent a digital bank run, Balz suggested that central banks may limit the amount of digital euros users can hold at any given time.

"I am not so sure whether incentives could, in reality, prevent a digital bank run. Therefore, the technical implementation of CBDC would need to be thoroughly thought over and tested."

Balz also stated that, while the Deutsche Bundesbank was deeply involved in discussions surrounding CBDC, it is also looking for alternative digital payment solutions so that the need to introduce a CBDC could be prevented along with the undesirable implications related to it.

To that end, he said that the central bank is also considering the ways in which it may link blockchain-based solutions and smart contracts with conventional payment systems.

In July, Balz said during a parliamentary session that cryptocurrencies were not currently a threat to financial stability.

He added that they could be dangerous if they "Fall outside the scope of regulators' authority or where there is an absence of international standards."