<p>From what I understood : the main difference between Central Bank Digital Currencies deposits and Private Digital Currencies (i.e. your deposits in a commercial bank account) is that the Central Bank can't bankrupt, while commercial banks can. In such situations, if depositors think that their bank will fail, they will substitute their private deposits with public deposits. This is called a &quot;bank run&quot;, and traditionally it was the substitution of deposits with cash. With a CBDC, there is another transmission channel.</p>
<p>Now, Niepelt says that if CBDC interest rates are higher than deposit interest rates, there is an incentive to only have CBDC and no private deposits. This is a risk for financial stability because without deposits, banks can't lend anything. So, if there is a remuneration on CBDC, and if this remuneration can be higher than private deposits remuneration, Central Banks must add something to stop the substitution effect. One way is to include a cap on CBDC deposits.</p>
<p>In such scenario, if CBDC interest rates are higher than private deposits, poor househols will hold CBDC only (because they don't have +10 000$ savings), while rich househols will have both CBDC to their maximum cap, and the rest of their savings will be held in private deposits. So if rich want to make decisions about their consumptions, they will use their private deposits instead of CBDC deposits (because interest rates is lower, thus opportunity cost is lower). Thus, the CBDC interest rates only affect poor households choices.</p>
<p>However, it is important to note that most Central Banks announced that they will not remunerate CBDC. Also, the hypothesis of Niepelt that CBDC remuneration can be higher than private deposits remuneration is a bit tricky, because I don't think it is probable. Interest rates will be higher for private banks because they can fail, it is a risk for depositors that will ask higher remuneration to compensate.</p>
<p>Anyway, I hope this helps</p>

CC BY-SA 4.0
2024-05-30T13:23:56.447Z
2024-05-30T13:23:56.447Z
justaneconomist
<p>1-In one of the digital pound papers (sorry, I don't remember which) it's written:</p>
<blockquote>
<p><em>Why do we need a limit for how many digital pounds I can hold?</em><br />
If we introduced a digital pound, we think we would need to set a limit
for how much people could hold. This would give us the time to
understand the impact that it might have on the financial system and
help us ensure it wouldn't cause disruption.<br />
Once we better
understand this and how people use it, we would review this limit.
We've not yet decided what the limit would be, but it would be high
enough for day-to -day spending. So you would receive all sorts of
payments, such as your salary, without worrying.</p>
</blockquote>
<p>2-It's also  explained in this speech to be from 10,000-20,000£ (I'm afraid in a similar reasoning that is not clear for you)
<a href="https://www.bankofengland.co.uk/speech/2023/february/jon-cunliffe-speech-at-uk-finance-update-on-central-bank-digital-currency" rel="nofollow noreferrer">https://www.bankofengland.co.uk/speech/2023/february/jon-cunliffe-speech-at-uk-finance-update-on-central-bank-digital-currency</a></p>
<p>3-To be honest, I study CBDC from Computer Science &amp; Engineering perspective; ie, I cannot explain the above in better words for you, but I know 2 other reasons that were mentioned in my field:</p>
<p>-<em><strong>To minimize the risks of money laundry</strong></em> (if your transactions are less than a certain threshold you can be execluded from AML investigations and keep your anonymity usually associated with crypto)</p>
<p>-<em><strong>To minimize the risk of Distributed Denial of Service attacks</strong></em> (think of it like gas limit in Ethereum: a max on spending and number of transactions, especially in offline payments, minimize the risk of DDoS attacks)
More details can be found here
<a href="https://www.weforum.org/agenda/2021/11/4-key-threats-central-bank-digital-currencies/" rel="nofollow noreferrer">https://www.weforum.org/agenda/2021/11/4-key-threats-central-bank-digital-currencies/</a></p>

CC BY-SA 4.0
2023-08-20T15:31:21.893Z
2023-08-20T15:31:21.893Z
ShAr
<p>From page 33 of Dirk Niepelt's <a href="https://www.vwi.unibe.ch/unibe/portal/fak_wiso/b_dep_vwl/a_inst_vwl/content/e195818/e195991/e556277/e1283995/dp2212_ger.pdf" rel="nofollow noreferrer">Money and Banking with Reserves and CBDC</a> (October 2022):</p>
<blockquote>
<p>Some central banks consider caps on CBDC balances to limit the maximum size of deposit-CBDC transfers (&quot;digital bank runs&quot;). In an environment with heterogeneous households such caps could allow to target monetary policy if CBDC paid a higher interest rate than deposits and &quot;poor&quot; savers only held CDC balances below the cap while &quot;rich&quot; savers held CBDC up to the cap as well as deposits. In such a situation the interest rate on CBDC would only have a direct substitution effect on the consumption and liquidity choices of poor savers.</p>
</blockquote>
<p>I cannot understand this. Also, why would this policy be implemented? Please explain. Thank you.</p>

<macroeconomics><monetary-policy><central-banking><cbdc>
Why limit the maximum size of deposit-CBDC transfers?
studentp
# Why limit the maximum size of deposit-CBDC transfers?

(Asked by: username_0 on 2023-05-23)

From page 33 of Dirk Niepelt's [Money and Banking with Reserves and CBDC](https://www.vwi.unibe.ch/unibe/portal/fak_wiso/b_dep_vwl/a_inst_vwl/content/e195818/e195991/e556277/e1283995/dp2212_ger.pdf) (October 2022):

> Some central banks consider caps on CBDC balances to limit the maximum size of deposit-CBDC transfers ("digital bank runs"). In an environment with heterogeneous households such caps could allow to target monetary policy if CBDC paid a higher interest rate than deposits and "poor" savers only held CDC balances below the cap while "rich" savers held CBDC up to the cap as well as deposits. In such a situation the interest rate on CBDC would only have a direct substitution effect on the consumption and liquidity choices of poor savers.

I cannot understand this. Also, why would this policy be implemented? Please explain. Thank you.

**Tags:** macroeconomics, monetary-policy, central-banking, cbdc

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## 2 answers

### Answer by username_1 on 2024-05-30. Score: 1 | Accepted answer

From what I understood : the main difference between Central Bank Digital Currencies deposits and Private Digital Currencies (i.e. your deposits in a commercial bank account) is that the Central Bank can't bankrupt, while commercial banks can. In such situations, if depositors think that their bank will fail, they will substitute their private deposits with public deposits. This is called a "bank run", and traditionally it was the substitution of deposits with cash. With a CBDC, there is another transmission channel.

Now, Niepelt says that if CBDC interest rates are higher than deposit interest rates, there is an incentive to only have CBDC and no private deposits. This is a risk for financial stability because without deposits, banks can't lend anything. So, if there is a remuneration on CBDC, and if this remuneration can be higher than private deposits remuneration, Central Banks must add something to stop the substitution effect. One way is to include a cap on CBDC deposits.

In such scenario, if CBDC interest rates are higher than private deposits, poor househols will hold CBDC only (because they don't have +10 000$ savings), while rich househols will have both CBDC to their maximum cap, and the rest of their savings will be held in private deposits. So if rich want to make decisions about their consumptions, they will use their private deposits instead of CBDC deposits (because interest rates is lower, thus opportunity cost is lower). Thus, the CBDC interest rates only affect poor households choices.

However, it is important to note that most Central Banks announced that they will not remunerate CBDC. Also, the hypothesis of Niepelt that CBDC remuneration can be higher than private deposits remuneration is a bit tricky, because I don't think it is probable. Interest rates will be higher for private banks because they can fail, it is a risk for depositors that will ask higher remuneration to compensate.

Anyway, I hope this helps


---

### Answer by username_2 on 2023-08-20. Score: 1

1-In one of the digital pound papers (sorry, I don't remember which) it's written:

> *Why do we need a limit for how many digital pounds I can hold?*  
> If we introduced a digital pound, we think we would need to set a limit
> for how much people could hold. This would give us the time to
> understand the impact that it might have on the financial system and
> help us ensure it wouldn't cause disruption.  
> Once we better
> understand this and how people use it, we would review this limit.
> We've not yet decided what the limit would be, but it would be high
> enough for day-to -day spending. So you would receive all sorts of
> payments, such as your salary, without worrying.

2-It's also explained in this speech to be from 10,000-20,000£ (I'm afraid in a similar reasoning that is not clear for you)
<https://www.bankofengland.co.uk/speech/2023/february/jon-cunliffe-speech-at-uk-finance-update-on-central-bank-digital-currency>

3-To be honest, I study CBDC from Computer Science & Engineering perspective; ie, I cannot explain the above in better words for you, but I know 2 other reasons that were mentioned in my field:

-***To minimize the risks of money laundry*** (if your transactions are less than a certain threshold you can be execluded from AML investigations and keep your anonymity usually associated with crypto)

-***To minimize the risk of Distributed Denial of Service attacks*** (think of it like gas limit in Ethereum: a max on spending and number of transactions, especially in offline payments, minimize the risk of DDoS attacks)
More details can be found here
<https://www.weforum.org/agenda/2021/11/4-key-threats-central-bank-digital-currencies/>


---

