Former member of ECB Supervisory Board: „Permissioned blockchains – overseen and supported by central banks – would make the international payment system safer and less costly. Europe is likely to be a follower, adapting to how international trends will develop.”

An EPC interview with Ignazio Angeloni, a senior fellow at Bocconi’s Institute for European Policymaking and at SAFE. Also, a former member of the European Central Bank (ECB) Supervisory Board

As stablecoins move from the margins of crypto markets into the mainstream of global finance, Europe faces a pivotal moment. Their growth raises pressing questions about monetary sovereignty, financial stability, and the interplay between private digital assets and public digital money. Economist and policy expert Ignazio Angeloni discusses the promises and risks of stablecoins in the euro area, their regulatory challenges, and how they might coexist – or compete – with a future digital euro.

1 – Stablecoins are becoming more visible in financial markets. In your view and from a European policy perspective, what impact could they have on monetary sovereignty and financial stability?

Two dimensions must be considered when assessing the potential impact of stablecoins. One is the inherent nature of the instrument: a privately issued money-like asset backed by collateral. The other is the infrastructure on which they are issued, held and exchanged: the blockchain. The two features are linked but distinct. All stablecoins trade on distributed ledgers, but not all assets circulating on blockchains are stablecoins (tokenised deposits, for example, are not).

Of the two, the blockchain is the most interesting and promising innovation, in my view. Centralised settlement of monetary transactions is not always feasible or efficient. For example, absent a world central bank, cross-border payments cannot be settled on a single centralised ledger. 

The existing cross-border payments system is inefficient and risky due to its reliance on correspondent accounts among large international banks. Permissioned blockchains – overseen and supported by central banks – would make the international payment system safer and less costly.

Monetary sovereignty in the euro area should not be at risk if the euro remains the sole accepted currency and if the ECB monetary policy instruments continue to work well. If EU legal tender legislation is sufficiently strong (which perhaps requires strengthening it further), dollar-denominated stablecoins should not be a concern. Authorities should monitor the development of euro-denominated ones, intervening if necessary to ensure that central bank money remains the cornerstone of the system.

2 – If stablecoins were to grow significantly in the euro area, what key risks should regulators pay close attention to?

Investor protection and financial stability are the two main regulatory concerns at present.
Like money market funds, stablecoins are potentially subject to confidence crises. Runs can lead to fire sales of collateral assets. From an investor protection standpoint, regulation must ensure that stablecoin holders are aware of those risks and that issuers are transparent regarding the quality of their collateral.

From a financial stability perspective, regulators must ensure that confidence is maintained and that asset sales, if they occur, are not transmitted to the rest of the system. Existing regulatory frameworks use several approaches to control these risks, but none of them, in my opinion, are strong enough to dispel financial stability concerns fully.

Three ways are available to control financial stability risks: redemption limits; collateral liquidity supervision and portfolio allocation rules. Each has strengths and limits:

Redemption limits act as circuit breakers when they are in place, but expectation of further limits can erode confidence and accelerate runs.

Liquidity can never be fully ensured: all assets (but central bank deposits) are risky, and markets do not always function.

Portfolio allocation rules do not prevent runs but can limit contagion to other segments – notably banks.
A combination of the three is likely to be needed. Regulators should learn from experience and, when necessary, adjust their regulatory approach.

3 – How do you see the relationship between stablecoins and a digital euro? Could they play complementary roles?

The debate around central bank digital currencies (CBDCs) and the digital euro over the last several years has helped clarify a number of things.

Most agree today that the existing domestic retail payment infrastructure (composed of payment cards, online platforms and handheld applications, all private, clearing on centralised ledgers and ultimately on central bank balance sheets) is already quite safe and efficient. Improving upon the status quo is certainly possible, but there is no compelling user-case argument for a new payment instrument issued and managed by the central bank. Such role would also put the central bank in conflict with its function as overseer of private payments.

By contrast, as already mentioned, improvements are possible in wholesale international payments. Here central banks could play a key role, and CBDCs and stablecoin could indeed be complementary. Permissioned blockchains among central banks, possibly including private institutions (banks and payment system providers), supported by lender-of-last-resort facilities, would give rise to a radically new international payment system, safer and less expensive for final users.

For this scenario to materialise, a high degree of central bank cooperation is be needed. There is a strong tradition of cooperation among the main – not only Western – central banks. Progress requires that such cooperation is upheld and strengthened, even in the present politically fragmented international environment.

4 – Looking ahead, what factors will determine whether stablecoins become an important part of Europe’s payment systems in the coming years?

I think the jury is still open, not only on whether stablecoins will be important in Europe, but more generally on whether they are bound to become a central feature of the global financial system. With a market capitalisation amounting to just over 300 billion US dollars worldwide (a small number) such outcome is far from assured at present.

A comparison of the growth of money market funds (MMFs) after 1979-80 (when they started growing in the US due to the legal prohibition on banks to pay interest on deposits) with stablecoins after 2020 – adjusted for inflation – suggests MMFs grew much more quickly in their initial years, even though banking regulations were subsequently loosened by repealing Regulation Q. The popularity of stablecoins in recent years benefitted from circumstances – the crypto boom during Covid and the political support at the onset of the second Trump administration – which were in many ways special. 

All in all, I think that stablecoins still have to prove their worth in global financial markets.

Europe is likely to be a follower, adapting to how international trends will develop.