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In the current digital era, the very concept of money is changing. At the forefront of this change are digital currencies, money that exists solely in a digital or electronic form such as cryptocurrencies and stablecoins. Digital currencies offer faster transactions, lower fees, and increased financial inclusion. Stablecoins and Central Bank Digital Currencies (CBDCs) can reshape the use and movement of money within the European Union.
CBDCs and stablecoins on the EU
Stablecoins are cryptocurrencies designed to maintain a stable value relative to another asset. This asset is usually a fiat currency, a precious metal like gold, or another cryptocurrency. The market for stablecoins is still developing in the EU, but there are several coins used in the region. EUR Tether (EURT) and Stasis Euro (EURS) are both pegged to the Euro. CBDCs are digital versions of fiat currencies issued by central banks. Unlike cryptocurrencies, CBDCs are issued by central banks, and are considered legal tender. The Bahamas, China, Sweden, the United Kingdom and Nigeria have either implemented or are exploring the implementation of CBDCs.
The introduction of CBDCs and proliferation of stablecoins offer several advantages for financial inclusion, payment systems, monetary policy and cross-border payments. Stablecoins maintain a relatively stable value due to being pegged to a stable asset. This also means that investors and businesses can plan their financial activities with greater certainty. Stablecoins can also be a bridge between traditional finance and digital currencies. CBDCs can provide access to financial services for unbanked or underbanked populations. They could streamline payment systems. Faster, cheaper and more secure systems would benefit both consumers and businesses. CBDCs can also give central banks new tools to conduct monetary policy. For example, CBDCs can target specific sectors of the economy or to stimulate economic activity during recessions. CBDCs could make cross-border payments easier and cheaper, promoting trade and investment within the EU and with other countries.
The EU's Approach to CBDCs and stablecoins
The EU is taking a cautious but proactive approach to CBDCs. The European Central Bank (ECB) has been exploring the possibility of issuing a digital euro. It has been conducting research and development on a potential digital euro. The ECB has also been consulting with stakeholders across the EU region including governments and central banks, businesses, and consumers, to gather feedback on the design and implementation of a digital euro. The ECB states that a digital euro would “complement banknotes and coins, giving people an additional choice about how to pay.”
In June 2024, the ECB published its first progress report on the digital euro preparation phase. Launched in November 2023, the preparation phase’s goal is to establish the frameworks for the potential issue of a digital euro. The report outlines the ECB’s progress in designing its methodology for digital euro holding limits, ensuring high-level privacy for users while maintaining regulatory compliance, protecting the digital euro from potential threats like fraud and cyberattacks and ensuring seamless integration with existing payment systems. The ECB is also providing technical inputs towards the creation of a legal framework for the digital euro. This framework will provide the necessary regulatory foundation for its issuance and operation. Additionally, the ECB is researching the development of offline functionality that would enable the use of the digital euro without an internet connection. Transactions would be between offline devices of its users (such as mobile phones and payment cards) without the use of third parties after pre-funding their digital euro account.
Several factors have contributed to the growing popularity of stablecoins in Europe. The development of blockchain technology has provided a secure and transparent infrastructure for the creation and issuance of stablecoins. The EU has been taking steps to establish a regulatory framework for stablecoins, providing a more predictable environment for businesses and investors. Additionally, the low-interest-rate environment in Europe has made stablecoins an attractive option for investors seeking to preserve their purchasing power.
The EU recognised the need for a comprehensive regulatory approach to stablecoins to address potential risks and ensure consumer protection. The ECB, European Commission, European Banking Authority and European Insurance and Occupational Pensions Authority worked together towards a Markets in Crypto-Assets (MiCA) regulation. The regulation entered into force in June 2023 and aims to establish unified rules for crypto assets (including stablecoins) across the EU. The legal framework aims to support market integrity and financial stability through the regulations of crypto-assets. Key aspects of the MiCA regulation include issuance requirements, consumer protection and financial stability. Stablecoin issuers will be subject to specific requirements, such as maintaining adequate reserves and providing transparency about their operations. The regulation will introduce measures to protect consumers from market manipulation, fraud, and other risks associated with stablecoins. MiCA will aim to ensure that stablecoins do not pose a threat to the stability of the financial system.
Digital currencies could play an increasingly important role in the future of the EU’s financial landscape. As the EU continues to explore the potential of CBDCs and stablecoins, it is essential to consider the potential benefits and challenges that lay ahead. By carefully navigating these issues, the EU can harness the power of digital currencies to create a more efficient, inclusive, and prosperous financial system.
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