European banking officials have consistently called for reduced dependence on US-controlled payment rails, promoting increased use of euro-denominated stablecoins alongside advancing plans for a digital euro.
European Central Bank (ECB) Governing Council member Joachim Nagel has highlighted the value of developing euro-denominated stablecoins and a digital euro in tandem.
He made the remarks on 16 February at an event hosted by the American Chamber of Commerce in Germany, where he addressed ongoing geopolitical tensions and the role of the US, linking these issues to digital currencies and Europe’s drive for greater sovereignty.
Nagel admitted he sees “merit in euro-denominated stablecoins” to be used for cross-border payments, citing their ability to be settled near instantaneously and lower remittance costs.
The $300bn global stablecoin market is dominated by US dollar-denominated stablecoins, such as USDT and USDC, making up the 99% stronghold it has on the market.
With euro stablecoins barely making 1%, Nagel is one of many European officials concerned over the US’ influence on its regional payment systems and currency.
US stablecoin sovereignty threat
In a speech delivered on 12 February, Nagel outlined a hypothetical scenario: should US dollar stablecoins gain popularity amongst European Union (EU) citizens, it would ‘severely impair’ the euro’s value and stability.
“Thus, if this market composition persists, a hypothetical replacement of a domestic currency with stablecoins would be equivalent to a dollarisation of the corresponding economy,” said Nagel. “In this scenario, the effectiveness of domestic monetary policy could be severely impaired, not to mention that European sovereignty could be weakened.”
European sovereignty of the euro has been raised multiple times in the past months regarding stablecoins, both euro and dollar denominated.
“To further reduce the likelihood of this scenario, we are considering how to leverage new technological opportunities to best effect,” indeed Nagel.
The digital euro has been viewed by the ECB’s Piero Cipollone and President Christine Lagarde as a digital alternative to cash, to be used for online and offline transactions and embed itself in an increasingly digital world.
The Digital Euro: Europe’s sovereignty saviour?
The European Central Bank’s proposed central bank digital currency (CBDC) is set for a key vote in the European Parliament later this year and, if approved, could be issued as early as 2029.
There have been vocal critics of the digital euro, particularly from the private sector, as banks believe it could undermine private regional efforts to challenge the likes of Apple Pay and Google Pay – Wero emerging as the main contender. But Nagel appears to be a supporter of both instruments.
“The introduction of a European wholesale CBDC would make our financial system more efficient and resilient,” he said. “The Eurosystem has already done the necessary exploratory work in this field and is pushing ahead with two projects.
While Nagel has pushed for Europe to adopt distributed ledger technology as a means to accelerate payments and settlements, particularly regarding tokenised deposits, ECB president Lagarde has been pushing the digital euro to be Europe’s answer to independence,
“If we do not have the digital euro, we will continue being on the railroads offered by non-European providers of services,” said Lagarde during a European Parliament debate on February 9.
“This is not European independence, this is not European sovereignty. And to those who indicate that this has come too late, you hold the keys to how fast it is going to be delivered.”
Are stablecoins and CBDCs interoperable?
Despite stablecoins and CBDCs rising to prominence in parallel post-Covid, there has yet to be a country or region that has integrated both into its financial system effectively.
Many countries have opted for one or the other. The US has chosen to promote dollar-denominated stablecoins with the establishment of the GENIUS Act, and the subsequent banning of CBDC’s with the passing of the Anti-CBDC Surveillance Act.
Meanwhile, China has developed its CBDC, the digital yuan (e-CNY), while also outright banning the use of crypto and now stablecoins.
While the ECB has been promoting the digital euro more heavily than euro-denominated stablecoins, it does allow stablecoin payment activity under its guidelines in the Markets in Crypto Assets (MiCA) regulation, such as minimum 30% in reserves and 1:1 backed reserves for each currency.
One country which has begun to implement both private and state-backed digital currencies is the United Arab Emirates (UAE).
The UAE has implemented stablecoin regulations within the Virtual Assets Regulation Authority’s (VARA) framework, such as capital requirements and a licensing process for issuers.
It has also begun shifting from a pilot phase to a testing phase for its CBDC; the Digital Dirham. The CBDC has progressed so much that it could be set for mandatory integration across licensed UAE payment providers this year.
