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FT editor Roula Khalaf will select your favorite stories in this weekly newsletter.
The author is chairman of Societe Generale and a former member of the European Central Bank’s Executive Committee.
Stablecoins are rapidly emerging as a disruptive force in global finance, and central banks are taking the right care. International settlement banks recently warned that a loss of trust in the issuer of Stablecoin could divert different coins from transactions in PAR. This will threaten financial stability, especially if the issuer’s reserves lose value or the liquid is insufficient to meet redemption requirements.
The ban on Stablecoins seems like an obvious solution, but it’s probably wrong. In fact, it’s neither viable nor desirable.
Instead, stablecoins need to understand what they are. It is a technical breakthrough that has a major impact on the financial system. They all allow low-cost peer-to-peer transactions near and across boundaries, all within a distributed infrastructure. On a large scale, issuers can help fund public debt to support government bonds. More broadly, tokenization – the technology that underpins stable offers the potential to modernize capital markets and improve efficiency across the financial sector.
This has not been lost in the US. Washington began introducing regulatory guardrails (such as genius acts) to control the issuance of stubcoins. As a result, private sector innovation is energizing with the use of major banks and financial institutions.
Europe has gained its credibility and is taking action. The EU market in Crypto-Assets (MICA) regulations is one of the most comprehensive crypto frameworks in the world, and has actually addressed some of the central bank’s concerns. To retain high quality liquid reserves (30% cash, the rest is highly rated sovereign debt), the Stablecoin issuer needs and builds protective measures to manage liquidity risk. The EU’s pilot structure for distributed ledger technology lays the foundation for a more robust market infrastructure.
Still, Europe is far behind. Almost 99% of stubcoins are issued in the US and removed in dollars. The euro is barely registered in this new digital financial ecosystem.
The reason for this is primarily cultural, not regulatory. They reflect unknown risk aversion and fear that continues to suppress innovation. Many European banks see threats and stubcoins to their profitable activities, particularly in payments and transactions. Investment needed for adaptation – Both technology and human beings are considerable, and the first movers fear that they are left to take risks on their own.
This is a classic case of coordination disorders. Unaddressed, it slows progress and puts Europe on the sidelines. Above all, leadership from public institutions is required. However, European financial authorities often continue to hesitate due to fundamental misconceptions.
First, there is a major underestimation of the strategic benefits that tokenization can provide for the integration of European capital markets and the development of euro-safe assets. This is evident from the belief that retail central bank digital currencies built on traditional infrastructure can effectively compete with stubcoins.
Second, there appears to be a false belief that European entities can be isolated from the use of global stubcoin. This is a concept that is not held in an interconnected financial system.
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Thirdly and most importantly, it appears that the authorities do not understand that not being proactive will ultimately endanger Europe’s financial sovereignty. In fact, unless Euro stables are issued and widely used in Europe, Euro area deposits will migrate to foreign platforms, disrupting the European payment system. Controlling financial and financial flows has long-term consequences for fiscal stability and policy effectiveness.
Ironically, Europe may be better positioned than the US to respond. While Washington has been bystanding the Federal Reserve in forming the Stablecoin regulatory framework, in the EU, central banks still have institutions that play a leading role. This not only regulates the issuance of stability, especially by institutions such as banks, but also mitigates systematic risk and adjusts innovation.
Europe has long struggled with its reputation for overregulation and technical inertia. This is an opportunity to chart another course. There is a tool. What you need now is leadership. If it fails, Europe will not only follow the pace set by others, but will also accept future alienation of global finance.
