ECB sees stablecoins driving a new era for digital payments and banking

Piero Cipollone, member of the executive board of directors of the European Central Bank (ECB), warned on Friday that the increasing popularity of stablecoins threatens Europe’s banking system because retail deposits will be detached from commercial banks. Speaking at a gathering of Italy’s cooperative banks in Rome on July 17, he said the trend adds to the pressure lenders already face from mobile payment platforms that have chipped away at payment revenues and customer data.

According to Cipollone, the ECB’s idea of the digital euro is the solution. The warning has special significance for smaller banks, which depend on deposits from people in order to finance local loans. If clients start to keep their money in stablecoins held in digital wallets rather than in their bank accounts, banks will need to substitute this source of income with more expensive wholesale borrowing and this may lead to the increase of lending rates in the economy.

According to him, the deposit risk is simply the latest step in the ongoing process of moving away from traditional banking. He stated that mobile payments are already covering more than 10% of the point-of-sale transactions in Ireland, the Netherlands, and Finland. Banks usually receive higher fees for mobile payments than they receive for debit card fees, but they also typically lose access to valuable customer transaction data that comes with those payments.

According to Cipollone: “If the use of stablecoins increases in the future, the banks will also lose retail deposits.”

The ECB emphasizes the dependence of Europe on foreign payment infrastructure. Approximately two-thirds of euro area card transactions are processed using non-European networks. Further, 13 out of the 21 eurozone countries lack a domestic card facility, thus, proving the need for a European-controlled payment system.

What stablecoins are, and why the dollar ones worry the ECB

Stablecoins are cryptocurrencies tied to fiat currencies, with the US dollar being the most common. Most of the market is rooted in Tether’s USDT and Circle’s USDC stablecoins, both of which are issued from outside the EU, which contributes to the ECB’s worries.

EU legislation regulates euro-denominated stablecoins under the Markets in Crypto-Assets (MiCA) framework but leaves US-dollar-pegged stablecoins mostly outside the framework’s direct oversight. It should be noted that euro stablecoin issuers must, under MiCA, keep at least 30% of their reserve assets in the form of bank deposits, with that figure rising to 60% for issuers valued as “significant.” These requirements, while helping banks operate under normal conditions, might lead to sudden bank outflows during mass redemptions activity.

Several ECB officials have voiced similar worries to Cipollone’s, including board member Isabel Schnabel, who stated in June that stablecoins pose a risk to both financial stability and monetary sovereignty and equated their emergence to the use of money-market funds that diverted banks’ deposits in the 1970s.

The digital euro as the ECB’s counter

The ECB highlights that digital euro will protect public funds in an increasingly digital economy while avoiding any dangers for commercial banks. The suggested central bank digital currency (CBDC) will not pay interest and will limit the amount of money each individual can keep in an account so as to prevent major withdrawals, while banks will still provide this service instead of customers doing it directly with the ECB.

“The digital euro would both preserve the role of public money and ensure banks remain involved in the payments ecosystem while continuing to meet their customers’ needs,” said Cipollone.

The ECB has recently made many remarkable moves to implement the plan by selecting 36 payment service providers, including Deutsche Bank, UniCredit, and Revolut for a 12-month pilot involving 19 national central banks. The beta pilot is scheduled for launch in the second half of 2027, and the European Parliament has voted for the initiation of formal legislative processes. Nevertheless, the bank is not expecting complete launch before 2029.

What it signals for the crypto market

According to the latest statement from ECB, Europe prefers token bank deposits and digital euro instead of stablecoins issued by private companies as the foundation for digital payment in the future.

This shift could limit the usage of stablecoins, even the ones that comply with MiCA’s requirements. Circle invested a lot of funds to meet the requirements of Europe, but representatives of ECB believe that regulation cannot solve every problem regarding monetary sovereignty and the movement of deposits. Circle has achieved compliance with the Markets in Crypto-Assets regulation (“MiCA”), the EU’s landmark crypto law. Of the top ten stablecoins by market cap, only USDC is in compliance with the new EU rules, and while smaller in market cap, EURC is also MiCA compliant. USDC and EURC are uniquely positioned to provide solutions for the European Union’s 450 million residents.

The strategy reaches beyond retail payments as well. The European Central Bank is working on Project Pontes, which aims to settle tokenized assets using central bank money. The bank is also working on Project Appia, which aims to create a public-private marketplace for tokenized finances, highlighting the bank’s effort to maintain the central role of commercial banks and central bank money in the digital financial system of Europe.

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