Digital euro versus stablecoins: an ideological clash between Europe and the United States?

Payments expert Piet Mallekoote explores the digital euro's progress and Europe's role amid the rise of stablecoins and the US's different approach.

Central banks around the world are working on a digital form of cash. Public money, also in digital form and accessible to all, contributes to the core task of central banks: ensuring confidence in the currency. The ability to convert private money issued by commercial banks into public money one-to-one at any time is a fundamental anchor of trust in the economy. A decline in the use of banknotes should not undermine this confidence.

This article discusses the progress of the digital euro project and raises the question of what role Europe should play in a world where stablecoins seem to be gaining importance, especially as the United States chooses a different path.

A number of countries have launched a central bank digital currency (CBDC): The Bahamas, Jamaica, and Nigeria. China is experimenting extensively with the digital yuan. In all of these countries, usage has so far been limited, with an adoption rate of less than 0.5% of physical banknotes. A recent survey by OMFIF shows that low public acceptance is one of the main concerns of central banks. Partly as a result, the number of central banks expecting to introduce a CBDC in the next three years has fallen from 18% in 2022 to 12% in 2023, according to the BIS (2024), to six central banks by the end of this decade. Decision-making seems to be moving to the longer term.

The ECB is leading the world in preparing for a CBDC (digital euro). The project is making steady progress, but a decision on its introduction cannot be taken until the legal framework has been adopted by the European Parliament and the Council of Ministers.

The ECB wants to speed up and has several reasons for this. First, the use of cash is declining rapidly. In point-of-sale transactions, the share of cash payments fell from 72% in 2019 to 52% in 2024 (ECB, 2024). For all retail payments together, it fell from 40% to 24% in the same period. The central bank sees it as its responsibility to keep public money available in an increasingly digital society. After all, central banks have to move with the times, even if this process has started rather late.

Second, the ECB is concerned about the sovereignty of the European payment system. More than two-thirds of card transactions in the euro area are processed by international payment brands, and online payments are no different. While these payment brands offer many innovative services, their heavy reliance on publicly traded US companies is a thorn in the ECB's side, especially in a geopolitically unstable world.

Third, the euro area payment market is highly fragmented. A desired ‘Sepa for cards’ has never materialised, despite the ECB's insistence. Private initiatives such as Wero and Bizum are trying to reduce fragmentation with the support of banks, but do not yet offer a fully-fledged pan-European alternative. Due to a lack of economies of scale and innovation, the European payment market is not competitive enough. Enrico Letta therefore advised the European Council to speed up the introduction of the digital euro and Mario Draghi called for accelerated technological innovation in his report to the European Commission. In addition to the digital euro as a means of payment, the ECB sees the digital euro platform as a platform for innovation to which private solutions can connect to achieve pan-European reach. This would lead to more competition, lower costs, and a more integrated payment market.

The ECB launched the investigation phase of the digital euro at the end of 2021. In this, the global design was explored and use cases were developed. The core principle is that every citizen of the euro area will be able to pay with the digital euro everywhere (POS, online, P2P). Banks will issue the digital euro on behalf of the ECB, as they do with banknotes. Acceptance by merchants is mandatory, ensuring a maximum level of coverage. An innovative feature is the offline functionality, which allows payments to be made without an internet connection and without banks as intermediaries. This increases both the privacy and the robustness of the payment system. The investigation phase has been completed with a final report in October 2023, after which the ECB has started the preparatory phase.

The preparation phase, which lasts until October 2025, focuses on finalising the Rulebook, selecting technical partners for the infrastructure and the digital euro app, finalising the architecture, and drawing up plans for pilots and the rollout. Work is also underway on a framework for holding limits (a maximum amount of digital euros that citizens are allowed to hold).

A final decision on implementation will only be taken after this phase. The ECB can only take this decision if the legal proposal for the digital euro is adopted by the European Parliament and the Council of Ministers. This process is not going very smoothly. There are differences of opinion within the Council, both between the Council and the ECB, and on the mandate of the ECB. Little progress was made under the Hungarian presidency (until the end of 2024) and no acceleration is expected under the current Polish presidency (until June 2025). Discussions in the European Parliament appear to be starting from scratch with a new rapporteur. As a result, it is uncertain whether the legal framework will be completed by October 2025.

While Europe is focusing on the digital euro, the United States is taking a completely different path. On 23 January, President Trump issued an executive order prohibiting the US central bank from issuing a digital dollar, while encouraging the use of dollar-backed stablecoins. This policy aims to strongly encourage innovation, keep the US attractive to fintechs and strengthen the dollar's global role.

Stablecoins are crypto-assets issued by private companies, often acting as an intermediary between the crypto world and the traditional financial system. Characteristically, their value remains stable because they are backed by underlying assets. Although they are now primarily used within crypto exchanges, the US is considering adopting stablecoins as a widely used means of payment.

Within six months, the US should have a regulatory framework for stablecoins. While Europe already has a strong regulatory framework for crypto-assets with the Markets in Crypto-Assets Regulation (MiCA), the US lacks one. Discussions on legislation such as the Genius Act (Senate) and the Stable Act (House) focus on rules around coverage (Europe has 100% coverage), combating illegal and fraudulent transactions, consumer protection, transparency, eligible issuers, and stability criteria. A recent US Senate committee hearing showed broad support for clear rules, provided they remain flexible enough to encourage innovation. The use of stablecoins as a means of payment was explicitly mentioned as a desirable goal.

Stablecoins offer key advantages: low transaction costs, speed, 24/7 availability, and international accessibility combined with the stability of fiat money. The largest stablecoins are Tether (USDT; USD 143 billion), USDCoin (USDC; USD 58 billion), and Ethana (USDe; USD 5 billion). However, euro-denominated stablecoins are limited to a market value of less than EUR 200 million. If the US regulatory framework becomes similar to Europe's, confidence in dollar-denominated stablecoins will increase. This increases the risk that they will be used as a means of payment in Europe, which is completely contrary to the ECB's goal of maintaining monetary sovereignty with the digital euro. Euro-denominated electronic money tokens (EMTs), such as those offered by the Dutch company Quantoz Payments, can play a crucial role in this regard. Being MiCA-regulated, they combine the advantages of stablecoins with the security and transparency of regulated money. This makes them a safer alternative for consumers and businesses who do not want to rely on US stablecoins.

The view that stablecoins are risk-free digital assets deserves a critical nuance. Even with good regulation, risks remain. One major concern is the exchange rate risk of stablecoins into fiat money. Although stablecoins are pegged one-to-one to fiat money, issuers' liquidity problems can lead to a deviation from the peg. In 2023, for example, USDC fell to USD 0.87 because it had money outstanding with Silicon Valley Bank, which went bankrupt. After the US government intervened, the rate recovered. This is an important difference from public money: balances in commercial money can always be converted one-to-one into public money, whereas this is not guaranteed with stablecoins.

There is also counterparty risk, such as fraud, hacking, or bankruptcy. If something goes wrong, the stablecoin can be exposed without a safety net beyond its own capital. Such risks also exist in traditional payment systems, but there are extensive safety nets in place to ensure financial stability.

Furthermore, network and transaction fees can add up with stablecoins, although they are usually lower than international transfer fees.

A major objection from a user perspective is that stablecoins, unlike fiat money, are not universally interchangeable. If the counterparty uses a different stablecoin, the user must exchange it before the transaction can be completed. This adds cost and complexity. In addition, crypto wallets can be complicated for users, creating a barrier to wider adoption.

When multiple risks come together, the impact can be significant. If used on a large scale, they can not only affect users but also put pressure on monetary policy and financial stability. This risk is amplified if stablecoins are mainly issued in US dollars. This could lead to an outflow of euro deposits from banks, with a possible negative impact on lending. These developments underline the need for appropriate regulation. The European MiCA rules are an important example of how the risks of stablecoins can be managed.        

While Europe is focusing on developing a public infrastructure with the digital euro and is struggling with the accompanying regulatory framework, the United States is taking a fundamentally opposite approach: a ban on a digital dollar combined with market-driven innovation centred on stablecoins issued by private companies.

Stablecoins offer significant advantages, particularly for international payments. The question, however, is to what extent future regulation in the US can effectively mitigate the associated risks. Europe may serve as an example in this regard, but risks remain. If used on a large scale, stablecoins - especially those denominated in US dollars - could put pressure on monetary and financial stability in Europe.

The key question is whether the platform envisaged by the ECB can break through the fragmentation of private payment solutions and stimulate innovations - including in EMTs - in a timely manner. In combination with the digital euro- if implemented in time and widely accepted - it can provide a powerful and secure alternative to American stablecoins. If not, Europe risks being left behind in a world where these stablecoins are becoming increasingly dominant.

About Piet Mallekoote

Piet Mallekoote studied macroeconomics at the University of Amsterdam. After a career of 25 years at the Dutch Central Bank he was -until his retirement in 2021- CEO of the Dutch Payments Association for many years and CEO of Currence (brand owner of Dutch payment schemes, among the online payment product iDEAL). He was a member of the former Digital Euro Market Advisory Group of the ECB (till November 2023). Currently, he is a non-executive Board member, a member of the Dutch Institute of Financial Disputes, and advises several payments companies.