Colombia’s central bank recommends limiting CBDC holdings and spending

The central bank of Colombia has not yet decided whether or not to issue a central bank digital currency, but believes that setting limits on CBDC transactions could bring about a number of benefits.

In its latest CBDC study, titled “Expected Macroeconomic Effects of Issuing a Retail CBDC,” Colombia’s Banco de la República concluded the potential introduction of a retail CBDC doesn’t pose any significant macroeconomic risks.

In order to mitigate any potential threats associated with CBDC, Colombia’s central bank recommended setting holding and spending limits for the digital currency. According to the regulator, such a CBDC design would increase the security of funds as CBDC holdings limits could safeguard users from cyberattacks targeting their balances or transactions.

Setting limits on retail CBDC holdings could also allow regulators to deal with the tradeoff between privacy and transparency by offering diverse tiers of limits.

For example, the Colombian central bank could offer digital wallets with small holding limits and a high level of privacy for people that place a high valuation to their transaction data. On the other hand, those who are comfortable with disclosing more data could prefer high holding limits and lower levels of privacy.

Additionally, CBDC limits could be beneficial for commercial banks as they would reduce the demand for a retail CBDC as a store of value in competition with bank accounts, the central bank noted.

“The introduction of the CBDC could be an attractive alternative for some risk-averse holders of other cash-like instruments,” the study reads, adding that this could impact the demand for government bonds, commercial papers and term deposit certificates. The study authors stated:

“By imposing CBDC holding limits to end users, this, and other types of situations — the tradeoff between privacy and security — could be easily controlled.”

While closely monitoring and studying the global development of CBDC, the Colombian central bank is still uncertain about whether its nation needs such a digital currency.

“The decision of issuing a retail CBDC must consider the fact that it would also need to have enough desirable features to generate a core group of users sufficient to generate the network externalities needed to make it viable,” the study authors stated.

Related: Canadians have ‘weak incentives’ to use a CBDC: Bank of Canada

A number of other global jurisdictions and organizations have considered setting limits on CBDC holding and spending as well.

In July, major United Kingdom finance trade bodies like UK Finance argued that the government should limit users’ digital pound holdings to between 3,000 and 5,000 British pounds ($3,800 to $6,400). According to UK Finance, a higher limit on Britcoin holdings — such as 20,000 pounds ($25,600) per individual — could destabilize the traditional banking system by facilitating bank runs or deposit competition with banks.

In 2020, the European Central Bank’s director general of market infrastructure and payments, Ulrich Bindseil, proposed the adoption of a digital euro holding limit of 3,000 euros ($3,271) per person.

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