A European Central Bank working paper finds that central bank digital currency holding limits can change user behavior beyond mechanically capping balances. Higher limits may attract holdings toward the cap, while lower limits produce offsetting attraction and repulsion effects. A reverse waterfall function, which automatically converts linked commercial bank deposits into central bank digital currency when needed for payment, increased adoption while reducing average balances. The findings are based on an incentivized online experiment with 761 participants in France, Germany, Italy and Spain. Among participants whose initial holdings were already below the cap, holdings increased significantly under the higher limit but did not change under the lower limit. Across all participants, the lower-limit treatment reduced average holdings from 2.80 to 1.93 tokens, while the higher-limit treatment raised them from 2.56 to 2.76 tokens, although the latter overall change was not statistically significant at the 5% level. Adding the reverse waterfall function increased adoption from 85.2% to 92.1% and reduced average holdings from 2.35 to 2.05 tokens, indicating that automatic funding could support central bank digital currency use while limiting balances and potential financial stability risks.
European Central Bank working paper finds higher central bank digital currency holding limits can lift balances while automatic funding raises adoption and lowers holdings
A European Central Bank working paper finds that higher central bank digital currency holding limits can attract balances toward the cap, while lower limits produce offsetting behavioral effects. In an experiment with 761 participants, a reverse waterfall function raised adoption from 85.2% to 92.1% and reduced average holdings from 2.35 to 2.05 tokens.