Last week one of the clauses in President Trump’s executive order relating to digital assets was for “promoting and protecting the sovereignty of the United States dollar, including through actions to promote the development and growth of lawful and legitimate dollar-backed stablecoins worldwide.”
In an event last week, European Central Bank (ECB) director Piero Cipollone responded. “I guess the key word here is ‘worldwide’,” Cipollone told a conference in Frankfurt, according to Reuters. “This solution, you all know, further disintermediates banks as they lose fees, they lose clients…That’s why we need a digital euro.”
We weren’t at the conference, so we don’t know what Mr Cipollone said before highlighting the need for the digital euro. A central bank digital currency (CBDC) is not a cure for bank disintermediation, even if the digital euro is distributed via banks. A CBDC accelerates disintermediation. The banking federations have been arguing for a more constrained roll out of the digital euro, precisely to prevent the flight of deposits to the CBDC.
The ECB has been transparent for a long time that a key motivation for the digital euro is European monetary and payment sovereignty. It doesn’t like the fact that digital payments in Europe are heavily reliant on US firms such as Visa, Mastercard and PayPal. Europe’s reliance on Russian oil was a wake up call.
Hence, President Trump’s use of the word ‘worldwide’ becomes a sovereignty threat to other economies.
However, we’d argue that an acceleration of dollar stablecoins does not support the argument for greater digital euro urgency.
USD stablecoins don’t justify a digital euro
Firstly, Europe has already enacted MiCA regulations, which foresaw the potential for foreign currency stablecoins to create monetary sovereignty issues. Hence, it has constraints on foreign currency stablecoins used for everyday payments. However, it allows their unfettered use in crypto and left a gap for dollar usage in financial markets.
Secondly, there are other European efforts on the digital payments front. But they aren’t getting a lot of love from the ECB.
For example, the European Payments Initiative (EPI) has so far rolled out a digital wallet (called wero) for instant bank-to-bank payments in three EU states, including the biggest, Germany and France. It has plans for broader expansion. That’s considerably further along than the digital euro.
Yet in a speech last year, Mr Cipollone highlighted that most European payment projects lack reach beyond one or a few jurisdictions, and this is the argument in favor of a digital euro.
We’d observe that the need for banks to spend money on the digital euro implementation could reduce the bank take up of wero. After all, banks have a choice about whether to participate in wero, but are likely to be compelled to implement the digital euro, subject to legislation. And their budgets are limited.
This appearance of the bank regulator becoming a bank competitor with a CBDC is hard to shake.
