The ECB would like to launch a digital euro, but is not sure yet. Until then, restrictive regulation should prevent a privately issued stablecoin from ever becoming relevant in the EU.
Stablecoins are controversial. This starts with the notoriously notorious Tether Dollars and ends with the Terra Dollars which collapsed last week .
But apart from that, stablecoins are more than just controversial: They can also be seen as an attack on the established currencies. Less on the dollar, which they mostly map, but on all the others. Thanks to stablecoins, the digital dollar is more available than ever.
No wonder the EU doesn’t like that. Because while we EU coiners continue to wait for someone to issue a sane, liquid euro coin, the dollar has long since become our unofficial dual currency. That was the case years ago when trading bitcoin against the dollar made the price, and it’s truer today, with DeFi, than ever. Anyone who does anything with DeFi usually does something with dollars instead of euros.
So it is understandable that the EU views the rise of stablecoins with much less favor than the US. The – American – magazine Coindesk has now received a paper in which the EU Commission presents a plan on how to prevent stablecoins from becoming too powerful in Europe.
The paper is listed as “non-paper”, meaning that it does not (yet) reflect the Commission’s formal position. However, Coindesk relies on two sources that confirm the authenticity of the paper. In it, the Commission joins EU finance ministers who have proposed tough measures to prevent Facebook’s stablecoin Libra (later Diem) from replacing the euro. Libra, later Diem, was abandoned even before it made its way into reality, but stablecoins remain in themselves, and with them the potential danger for the euro and the considerations of how to defuse them.
As early as 2020, when Libra was neither born nor dead, the EU decided that stablecoins with a volume of 5 million euros or more require a license. However, this does not seem to go far enough for the Commission and the Council of Ministers. According to the document, the Commission endorses the Council’s proposal for a hard border. The release of a stablecoin should therefore be stopped if it reaches more than one million transactions per day and / or (this is not entirely clear) the market value exceeds 200 million euros. Only when these thresholds are undercut again, the issuer may create further coins. In short: the EU wants to ban stablecoins from becoming relevant.
According to the document, the Commission favors this Finance Ministers proposal, while the European Parliament would prefer successful stablecoins to be subject to regulation by the European Banking Authority.
More generally, the EU and ECB now seem to be realizing that while shadow-boxing against Libra, a number of successful stablecoins have formed in the cryptocurrency ecosystem. At least several representatives of the institutions are currently shooting verbally against stablecoins.
For example, Francois Villeroy de Galhau, the governor of the Bank of France. He said at a conference in Paris that crypto assets need more regulation. Stablecoins, according to the central banker, are misleadingly named. The recent crash should be a “wake-up call” for global regulators who have made little progress in regulating cryptocoins. In the meantime, the ecosystem has grown so much that “crypto assets could (dis)disrupt the international financial system if they are not regulated and monitored in a consistent and appropriate manner across jurisdictions”.
In Ireland, meanwhile, Fabio Panetta, a representative of the ECB itself, gave a keynote speech. In this he also spoke about crypto assets and stablecoins. The “recent developments” illustrated “that it is an illusion to believe that private instruments can serve as money if they cannot be converted at any time to public money at par.” Cryptocurrencies are not, as claimed, “a trustworthy kind of ‘currency’ out of public control’, but ‘too risky to serve as reliable means of payment’. They behaved much more like speculative investments, which now embodied multiple threats to political and financial stability. “Anyone who invests in cryptos must be prepared to lose their entire investment,” the central banker warns.
So-called stablecoins mitigate this risk and “have the potential to become systemic globally, especially if issued by big techs.” However, even stablecoins are not without risk. “There is no guarantee that they can be redeemed at the same value.” Just last week, the world’s largest stablecoin briefly lost parity. Panetta, of course, means the tether dollars, which actually traded under a dollar for a few hours . The dig shows how closely Panetta is eyeing the market.
Stablecoins would not benefit from deposit protection, nor would they have access to central bank “ standing facilities ”. These are monetary policy operations by the central bank intended to limit the short-term volatility of interest rates in the money market. So since stablecoins don’t enjoy these protections, they are vulnerable to bankruns – “as we just saw with the crash of another stablecoin – TerraUSD”. Panetta watches the market.
However, the central banker is less concerned with the usual stablecoins and more with a stablecoin that does not yet exist – a digital euro to be issued by the ECB. He sees an increasing need for digital currencies, including stablecoins, and he predicts that either the “official sector”, i.e. central banks, will fill this need – or others will.
Therefore, numerous countries in the world are dealing with central bank digital currencies, and the first ones have already issued them. It would be a “stable, reliable means of payment, designed to serve the public interest.” With such a digital euro, Europe could “protect our strategic autonomy while remaining open to a world where technology and interdependence are increasingly weaponized will.”
Panetta then explains some details about possible concepts of a digital euro and the conflicting goals that go hand in hand with them. At the end of 2023, one could then decide to go into a phase of implementation in order to develop and test appropriate technical solutions and to explore how and through which middlemen one rolls out the digital euro. This phase could last three years.
If a digital euro comes from the central bank, this will not be until 2027 at the earliest. To keep the world from running away from the EU by flooding the eurozone with digital dollars, the EU may have no choice but to take restrictive action on private stablecoins.