Bundesbank President Wants Euro-Pegged Stablecoins to Prevent Dollarization

Europe-linked stable coins could provide cheap payments and counter the threat of dollarization from USD-pegged counterparts, said Joachim Nagel, member of the European Central Bank’s Governing Council.

Speak at the American Chamber of Commerce in Germany Earlier this week, Nagel – who is also president of the German Bundesbank – discussed how Europe could adapt to its changing relationship with the United States.

One of his proposals was to “channel efforts to support the international role of the euro”, which would also include the development of European payment systems.

And for Nagel, this could mean the introduction of euro-denominated stablecoins, “as they can be used for cross-border payments by individuals and businesses at a low cost.”

Such euro-based stablecoins could not only deliver cheaper transfers and payments, but also Nagel proposed last week that such stablecoins could provide protection against the dollarization of the eurozone.

“A hypothetical replacement of a domestic currency by [USD-pegged] stablecoins would amount to a dollarization of the corresponding economy,” he said. “In this scenario, the effectiveness of domestic monetary policy could be seriously compromised, not to mention that European sovereignty could be weakened.”

In light of this risk, Nagel said last week that the ECB and European central banks are considering new technological options, including a large-scale CBDC, which would “enable institutional actors in financial markets to conduct programmable transactions in central bank money.”

The Eurosystem is also evaluating the possibility of using distributed ledgers for non-central bank money, including “tokenized deposits and euro-denominated stablecoins.”

According to Nagel, both large-scale CBDCs and euro-pegged stablecoins would give the Eurosystem the ability to “use cutting-edge digital technologies to maintain the effectiveness of our monetary policy in an uncertain geopolitical future.”

These comments were echoed in Nagel’s speech in Germany on Monday, with the ECB official reiterating that the Eurosystem is working on the digital euro, which will be “the first pan-European digital retail payment solution based solely on European infrastructures.”

The ECB and the digital euro

The ECB aims to launch a digital euro in 2029, despite some disagreement over the details German Vice Chancellor Lars Klingbeil said this last week that the postponement of the CBDC ‘harms’ Europe.

His comments came as the European Parliament an amendment approved that would introduce an online and offline version of the digital euro, marking a shift from its previous position in favor of offline payments only.

Despite the apparent push to introduce stablecoins in Europe and elsewhere, some economic commentators warn that there could be downsides.

This is the opinion of economic author and journalist Paul Blustein, who told Declutter that not only would stablecoins violate the singleness of money principle, but that “there is a high risk for developing countries of dollarization that would undermine the ability of central banks to maintain control over their countries’ money supply.”

Although this is precisely a concern that Nagel has addressed in his two recent speeches, Blusten – who has written extensively on the status of the US dollar– downplayed the possibility that dollarization (via stablecoins) could occur to any significant extent in Europe.

“I don’t think the dollarization threat is as big a problem for Europe as it is for developing countries,” he said. “Europeans generally have confidence in the euro and the ECB.”

Blustein, a senior fellow at the Center for Strategic and International Studies, suggested that while Nagel is not exactly panicking about the threat of dollarization in Europe, the Bundesbank president is aware and right that it “poses a major threat elsewhere in the world.”

Faced with this danger, Blustein argues that a better approach for Europe is to move forward as quickly as possible on tokenized deposits, which “do not have the disadvantages” commonly associated with stablecoins.

“If tokenized deposits are successful in Europe, it could expose the weaknesses of stablecoins,” he said. “Trying to beat the US in the stablecoin game may be a losing proposition; trying to beat stablecoins with a superior instrument seems more promising to me.”

Matt Osborne, Policy Director, UK & Europe at Ripple, argued that the future of the monetary system is a ‘mixed money ecosystem’. Declutter that the EU “needs global stalecoins.”

“Concerns about the risks to monetary sovereignty are valid but should not be exaggerated,” Osborne said Declutternoting that the euro is stable and familiar, and that there is “little reason” for the adoption of the dollar in domestic payments in the EU. He added that the dollar is “already widely used for cross-border payments, trade invoicing and cross-border lending,” with dollar-backed stablecoins making these existing use cases “more efficient.”

“Rather than being a threat, stablecoins are complementary to the current monetary system,” Osborne added.

As for the downsides of stablecoins, Blustein said he sees some major drawbacks even if such tokens can provide cheap and fast cross-border payments.

He said: “The most important is the likelihood that stablecoins will facilitate illegal transactions.”

While he acknowledges that blockchain transparency can help law enforcement tackle bad actors, Blustein also claims that it provides criminals with a range of tools to “exploit the system and circumvent AML/KYC requirements, for example with self-hosted wallets and mixers.”