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Eurozone banks need a digital euro to respond to U.S. President Donald Trump’s initiative to promote stablecoins, a type of cryptocurrency typically tied to the U.S. dollar, said Piero Cipollone, a member of the European Central Bank’s (ECB) board, on Friday, as cited by Reuters.
On Thursday, Trump announced in an executive order that he would "promote the development and growth of lawful and legitimate stablecoins backed by the dollar on a global scale," as part of a broader cryptocurrency strategy.
Cipollone emphasized that this move could further draw customers away from banks and reinforce the need for the ECB to launch its own digital currency.
“I think the key word here (in Trump’s executive order) is global. This solution, as you well know, leads to further disintermediation of banks, which lose fees, lose customers... That is why we need a digital euro,” Cipollone stated at a conference in Frankfurt.
What Is a Digital Euro?
Stablecoins function similarly to money market funds, providing exposure to short-term interest rates in official currencies—almost always the U.S. dollar.
A digital euro, on the other hand, would be an online wallet guaranteed by the ECB but operated by companies such as banks. It would allow people, including those without a bank account, to make payments, although holdings might be capped at a few thousand euros and would not earn interest.
Eurozone banks have expressed concerns that a digital euro could lead to a decrease in their deposits as customers transfer some of their cash to ECB-guaranteed digital wallets.
The European Central Bank is currently experimenting with how a digital euro would work in practice, but a final decision on its launch will only be made after European lawmakers approve the necessary legislation.
Trump’s executive order also prohibits the U.S. Federal Reserve from issuing a central bank digital currency (CBDC).
Meanwhile, other countries, such as Nigeria, Jamaica, and the Bahamas, have already launched digital currencies, while 44 others, including Russia, China, Australia, and Brazil, are running pilot projects, according to a report by the Atlantic Council think tank.
In this global context, Cipollone concluded that the launch of a digital euro could become essential to maintaining the eurozone’s economic competitiveness.
The Digital Euro Divide in the EU
The European Central Bank is dedicated to the development of a central bank digital currency (CBDC), yet interest levels among Eurozone members vary significantly.
As reported by Giovanna Faggionato and Ben Munster in Politico, several EU governments, notably France and Germany, contend that the European Central Bank has acquired excessive authority over a vital issue: the amount of digital currency that citizens can hold in central bank-backed 'wallets.'
This concern stems from the potential for a CBDC to exacerbate both the frequency and intensity of bank runs. In response, numerous policymakers have suggested implementing restrictions on the usage of a CBDC. For instance, some proposals seek to cap the total amount an individual can possess, while others aim to regulate the spending limits over a specified period.
Policymakers typically aim for these restrictions to reduce the amount of money that can exit banks during times of crisis. However, the situation is more complex in reality.
If the limit is set too high, it may fail to prevent bank runs. Conversely, if the limit is set too low, it could hinder individuals from utilizing the Central Bank Digital Currency (CBDC). In my book, Digital Currency or Digital Control? Decoding CBDC and the Future of Money, I explore this dilemma extensively, referring to it as the “CBDC tradeoff,” a concept introduced by economist William Luther. Essentially, this tradeoff involves balancing the creation of a desirable financial product against the potential risks to the broader financial system, as well as the risk of developing something that lacks appeal and squanders taxpayer funds.
European politicians are increasingly aware of the potential drawbacks associated with the introduction of a Central Bank Digital Currency (CBDC). According to Politico, there are growing concerns that a CBDC could "jeopardize the stability of the entire banking system," "infringe on personal financial freedom," and "fuel fears of a 'Big Brother' state."
These apprehensions are indeed valid. Given that the advantages of implementing a CBDC remain ambiguous, it would be prudent to dismiss the tradeoff altogether. Citizens should not be compelled to choose between two unfavorable alternatives.
Earlier this year, the House of Representatives passed legislation to prevent the establishment of a CBDC in the United States. At that time, some congressional members argued that this decision would position the U.S. as the only nation globally to reject CBDCs. However, with the current discussions taking place in the Eurozone, it appears that the U.S. may not remain the sole dissenter for long. It is possible that the United States has set a precedent for others to follow.