TheJakartaPost
Please Update your browser
Your browser is out of date, and may not be compatible with our website. A list of the most popular web browsers can be found below.
Just click on the icons to get to the download page.
Popular Reads
Top Results
No results found. Please check your search term and try again
Can't find what you're looking for?
View all search results
Popular Reads
Top Results
No results found. Please check your search term and try again
Can't find what you're looking for?
View all search resultsEurope needs a euro stablecoin
As envisioned, the digital euro will be useless for corporate transactions, and it will probably not play a significant role in liquidity management or wholesale payments.
Change text size
Gift Premium Articles
to Anyone
Share the best of The Jakarta Post with friends, family, or colleagues. As a subscriber, you can gift 3 to 5 articles each month that anyone can read—no subscription needed!
A US$100 bill lies on top of euro bills in Bogota on July 12. (AFP/Daniel Munoz)
E
urope has high hopes for the “digital euro” now in development. Cash has long served as the ultimate anchor for commercial bank deposits, direct claims on the central bank, thereby underpinning trust in the financial system as whole. In the digital age, when cash’s share of even small retail transactions is dwindling fast, the European Central Bank hopes that the digital euro can fill that role.
But ambitions for the digital euro extend further. Europe also hopes that the currency can bolster its strategic autonomy, in a world where the United States dollar is the preeminent international reserve currency, and payment systems, international and domestic, are dominated by private US companies. According to this vision, the digital euro would safeguard the euro’s international role and support challengers to US payment hegemony. On its own, however, the digital euro is unlikely to fulfill these expectations.
The digital euro has been conceived as a complement to physical cash. Like cash, digital euros would be distributed by commercial banks but redeemable by the central bank. Like cash, they would be legal tender, so Europeans could use them to pay for purchases, and to send money to one another. And like cash, they would offer no yield. Though digital-wallet holdings will be capped at 3,000 euros (US$3,500), they can be freely topped up.
But, as envisioned, the digital euro will be useless for corporate transactions, and it will probably not play a significant role in liquidity management or wholesale payments. And these transactions, not retail payments, are the ones that will make a difference in strengthening Europe’s strategic autonomy, including in payments.
The ECB has a plan to expand the digital euro’s role in wholesale payments by linking its central ledger system to the wholesale-payments systems of the future, which will probably be underpinned by distributed ledger technology (DLT). To this end, two programs have been announced. The Pontes program is a shorter-term initiative, focused on creating a bridge between private DLT platforms and the ECB’s existing centralized-ledger system, TARGET Services. The more ambitious Appia program aims to create a “future-ready” integrated financial ecosystem, based on DLT.
These initiatives will enable the ECB to act as the main counterparty for a range of exchanges, including inter-bank money-market transactions, in a world where banks and other market participants have embraced DLT. But since all they will really do is make it as quick and efficient to use euros for wholesale transactions as it is to use US dollars or other currencies, Pontes and Appia are unlikely to bring about a substantial increase in the euro’s share of international transactions or foreign reserves.
There is, however, a potential game-changer: stablecoins (digital assets that are pegged to traditional fiat currencies or commodities). Stablecoins could act as an alternative to deposits. While the Appia program does not commit the ECB to creating a euro stablecoin, it will create the infrastructure for a stablecoin’s development. And with supportive regulations, stablecoins could combine the speed and efficiency of digital payments with the security of bank deposits.
