Piero Cipollone, a member of the European Central Bank (ECB) board, recently highlighted the urgent need for Eurozone banks to consider adopting a digital euro. This comes in response to US President Donald Trump’s recent strategy to encourage the use of stablecoins.
These stablecoins, which are linked to the US dollar, form part of a broader vision outlined by Trump in an executive order issued last Thursday.
Comparing Stablecoins and Digital Euro
Cipollone raised alarms that Trump’s initiatives to advance dollar-backed stablecoins might further draw customers away from conventional banks, strengthening the case for the ECB to roll out its digital currency.
He commented during a conference in Frankfurt, noting, “The key word in Trump’s order is ‘worldwide.’” This push for global adoption of stablecoins is expected to increase the disintermediation of banks, resulting in diminished fees and clientele.
Stablecoins are akin to money market funds and provide access to short-term interest rates tied to a stable currency, primarily the US dollar. In contrast, the proposed digital euro would act as a digital wallet, backed by the ECB but managed through financial institutions like banks.
This digital currency is designed to facilitate easy payments for individuals, including those without bank accounts. Nonetheless, there may be restrictions on how much one can hold, likely limited to a few thousand euros, and these holdings would not generate interest.
Risk of Digital Euro Harming Bank Liquidity
Concerns have been voiced by banks regarding the possible effects of a digital euro on their liquidity, as noted by Reuters. They fear that customers might shift their funds to an ECB-supported wallet, which would pull cash away from their reserves.
The ECB is presently piloting the practical usage of a digital euro, but the ultimate decision on its rollout hinges on the approval of pertinent legislation by European authorities.
Additionally, in a notable development, Trump’s executive order has barred the Federal Reserve from introducing its central bank digital currency (CBDC). This move aligns with a larger global trend, as various countries, including Nigeria, Jamaica, and the Bahamas, have already launched their respective digital currencies.
Furthermore, 44 other nations, such as Russia, China, Australia, and Brazil, are engaged in pilot projects for their digital currencies, according to research from the Atlantic Council.
The increasing relevance of a digital euro is underscored in the face of competitive challenges from stablecoins and other digital assets within the European Union.
The ECB’s initiative towards a digital euro could drastically alter Europe’s banking environment, ensuring its competitiveness in a digital-driven economy.
As of now, the total market cap of digital assets has reached $3.52 trillion, with stablecoins accounting for approximately $215 billion of that, according to data from DeFiLlama.
Featured image from Bloomberg, chart from TradingView.com
