The ECB vs. Stablecoins: Misguided Fears, Missed Opportunities
The digital euro project risks squandering Europe's first mover advantage in digital finance and weaken global demand for the euro and euro-denominated assets.
In recent months, Christine Lagarde and other officials at the European Central Bank (ECB) have issued multiple warnings labeling stablecoins, in particular dollar denominated stablecoins, as a threat to EU financial stability. Their proposed counterweight? The digital euro, a central bank digital currency (CBDC) touted as the only trustworthy alternative to safeguard monetary sovereignty.
However, on closer inspection, their aversion to stablecoins appears less grounded in sound economics or empirical evidence, but more in a reflexive impulse to control and preserve institutional dominance. Let’s dive in:
Throwing the baby out with the bathwater
According to public statements and in a recent meeting with the European Commission, the ECB argued that MiCA (the EU’s regulatory framework for digital assets including stablecoins) may not be robust enough to withstand the rise of a rapidly growing US stablecoin sector. In essence the central bank is concerned that permitting dollar-backed stablecoin issuers to operate across both the US and EU markets might give an advantage to established non-EU players who already dominate the sector. This, in turn, could lead to a surge of European capital flowing into US debt markets, potentially weakening the EU’s efforts to support its own sovereign debt markets.
Furthermore, the ECB takes issue with the “multi-issuance” model where EU-based stablecoin issuers partner with counterparts outside the EU. In a worst-case scenario it warned, EU-based issuers might be obligated to redeem tokens held by both foreign and European investors. If either group were to face insolvency, it could trigger a "run" on reserves with potential ripple effects for banks with exposure.
Thankfully, the Commission pushed back forcefully on these issues, suggesting the ECB's interpretation of MiCA was fundamentally flawed. It said the regulation, which went into full force only four months ago, had been carefully crafted to address the very problems the ECB highlighted. It argued that it would be economically illogical for US customers to demand redemptions from European issuers, and dismissed the idea of a bank-style run on fully backed assets as implausible.
One official went even further, accusing the ECB of inflating fears about stablecoins to gain political momentum for its digital euro initiative, a project supposedly aimed at creating a unified European payment network, but in reality politically-charged and designed to counter the adoption of stablecoins and other crypto assets.
All this being said, we believe the ECB’s hostile stance towards stablecoins in favour of a digital euro is a strategic blunder and long-term detrimental to the euro’s appeal as a reserve currency. Just as the rest of the world is embracing the benefits of stablecoins on public blockchains, the ECB appears stuck in a protectionist, power-grabbing reflex on a topic over which it has questionable jurisdiction.
The Digital Euro: A Solution in Search of a Problem
The ECB’s chosen alternative to stablecoins has fundamental problems, both philosophical and practical:
Commercial banks: A widely adopted CBDC would reduce the need for citizens to deposit funds with commercial banks. If people move their deposits en masse to a central bank wallet, it would in theory remove the need to deposit funds with commercial banks and upend their critical function in the economy. The ECB’s workaround? A cap on individual holdings at €2,000 or €3,000. It’s hard to take such a proposal seriously as it clearly does not meet the definition of a scalable payment solution, and risks creating a dual monetary system: a legacy system which lacks efficiency vs a new system which lacks utility.
Privacy: Every-day payments settling directly at the central bank would amount to a kill switch which could pose a significant encroachment on our privacy and personal liberties. Particularly in nations with a weak(er) rule of law. Policymakers are always quick to tout the benefits of tracking payments to fight crime. However, without the appropriate checks and balances, identity and money laundering regulations could easily be used as a cover for invasive surveillance and coercion.
Neutrality: A CBDC, whether capped or not, will if anything, worsen the euro’s appeal as a reserve currency, and European sovereign debt as a store of value. Though one could argue the US dollar and treasuries have always reigned supreme here, European nations’ growing debt levels and budget deficits should act as a strong incentive to maximise desirability of the euro and euro-denominated debt. An ECB exerting more control over payments and transactions, although making sanctions enforcement more effective, will severely affect the euro’s perceived neutrality and holding premium in the long run.
Interoperability and efficiency: Running a CBDC on bespoke rails incompatible with global payment networks including blockchains just adds more layers and costs to an already complex system. It is also far from clear as to whether a digital euro will be able to remove the many intermediaries involved in current payments. The ECB's main objective appears to be the creation of a walled garden in which users would not be able to benefit from instant and quasi-free overseas payments, as stablecoins allow. Moreover, euro-denominated assets would not be able to benefit from foreign investment flows coming from other parts of the world moving assets and capital onto blockchains.
In summary, a digital euro as envisioned by the ECB would fail to meet any kind of real-world liquidity and interoperability needs, and further silo individuals and businesses in an already fragmented financial system.
Stablecoins: True 0-1 Innovation
What makes the ECB’s position particularly frustrating is that we already have a functioning model for modern digital money: regulated stablecoins. Fiat-backed stablecoins which are pegged 1-1 to the dollar or the euro with for example, combine the benefits of a blockchain’s open and global standard with the required regulatory compliance. They allow individuals and businesses to settle transactions in any jurisdiction, in real time, and at a fraction of traditional costs.
Unlike CBDCs, stablecoins aren’t a band-aid solution which would add another layer of complexity to an already convoluted system. They’re built on open-source protocols that can plug into (and eventually replace) existing systems. One only needs to look at emerging markets to see a glimpse of the future; in particular countries with a weak currency have seen the strongest adoption of stablecoins across a variety of use cases including cross-boarder remittances, salary payments, FX conversions, and investments. Stablecoins also create new opportunities for businesses and individuals:
Global source of liquidity: Stablecoins connect businesses to a global liquidity network, previously siloed and fractured but now united and interoperable through blockchains.
New investment products: Stablecoins provide access to a wide array of low-cost and high-yielding cash management products which cannot be accessed through traditional banks and brokerages due to local regulatory and technology hurdles.
AI-native payment rails: As mission critical business processes and workflows gradually migrate to execution by autonomous agents, those businesses that can unlock agents’ full transactional capability by allowing them to access stablecoin payment rails will realise the highest efficiencies.
Last but not least, history is filled with examples where centrally-mandated technology standards flopped when competing against open, market-driven innovation. Whether it was the US government-backed OSI vs TCP/IP in the internet protocol wars, the Clipper Chip encryption standard proposed by the Clinton administration or China’s homegrown WAPI standard for Wi-Fi, all proved inferior to private market solutions due to a mix of technical vulnerabilities, implementation challenges, interoperability issues and privacy concerns.
Perhaps the important takeaway here is that even in cases where national security was the main impetus for a government-mandated solution, any regulatory requirements proved easily integratable into private market solutions. The exact same thing holds true for public blockchains and stablecoins: a public blockchain is a vastly superior innovation platform due to its open-source and transparent nature. Every single (stablecoin) application built atop the chain is composable, natively interoperable, and fully programmable meaning any kind of compliance requirements (think KYC/AML) can be coded into the application with ease.
Regulate to Compete, Not to Control
The US is moving swiftly to shore up dollar dominance by giving regulatory clarity to stablecoin issuers. The recently proposed Stablecoin Bill GENIUS effectively turns stablecoins into a new demand source for US Treasuries.
Europe, by contrast, has had a head start since mid 2023 with MiCA, its regulatory framework for crypto. That could have positioned it as the global home for regulated crypto finance but only a handful of licenses have been issued since due to bureaucratic gridlock and institutional resistance. Why not use the euro's strong institutional credibility to back euro-denominated stablecoins with national or EU sovereign debt? This would provide a compliant, private-sector-led instrument to support euro adoption globally, especially in emerging markets where euro usage remains limited.
One major obstacle to mass-adoption of permissionless blockchains has been the Basel Committee’s rules on crypto-assets. These rules categorise crypto as high-risk, which effectively prevents banks from holding significant amounts on their balance sheets. At present, tokenized securities issued on public blockchains (such as SME loans or public equities) are treated the same way as crypto whereas tokenized securities issued on a permissioned ledger (this is just a database not a blockchain) benefit from favorable regulatory treatment.
Recent announcements of euro-backed stablecoin launches by ING, Société Générale and Deutsche bank are a step in the right direction but we need broad consensus across lawmakers, regulators and central bankers that stablecoins are good for business and that public ledgers are the best way to modernise our financial system.
The EU must decide whether it wants to lead in digital finance or follow the ECB's misguided mantra. The introduction of a CBDC would be a regression and only worsen the already bloated cost, complexity and fragmentation of the legacy system. Ultimately, it risks squandering Europe’s lead in digital finance and weaken global demand for the euro and euro-denominated assets. Stablecoins on the other hand are a chance to extend the euro’s reach, improve payment rails, and reduce transaction costs for millions of individuals and businesses.
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