In a recent statement, European Central Bank (ECB) board member Piero Cipollone emphasized the need for Eurozone banks to adopt a digital euro in light of US President Donald Trump’s initiative to advertise stablecoins. 

These cryptocurrencies, pegged to the US dollar, are a part of a broader strategy outlined by Donald Trump in an executive order issued last Thursday.

Stablecoins Vs Digital Euro

Cipollone expressed concern that Trump’s give attention to fostering the event of dollar-backed stablecoins could further divert customers away from traditional banks, thereby strengthening the argument for the ECB to introduce its own digital currency. 

“The important thing word here in Trump’s executive order is ‘worldwide,’” Cipollone remarked during a conference in Frankfurt. He noted that this push for global stablecoin adoption would exacerbate the disintermediation of banks, resulting in a lack of fees and clients.

Stablecoins function similarly to money market funds, providing exposure to short-term rates of interest in a stable official currency, most frequently the US dollar. In contrast, a digital euro would function a web-based wallet backed by the ECB but operated by financial institutions comparable to banks. 

This digital currency would enable individuals, including those without bank accounts, to make payments easily. Nevertheless, there could also be limits on holdings, likely capped at a number of thousand euros, and these holdings wouldn’t accrue interest.

Digital Euro’s Potential To Drain Liquidity From Money Reserves

Reuters reports concerns which have also been raised by banks regarding the potential impact of a digital euro on their liquidity. There may be a fear that customers might transfer funds to an ECB-backed wallet, thus draining their money reserves. 

Currently, the ECB is experimenting with the sensible applications of a digital euro, but a final decision on its launch will rely on the approval of relevant laws by European lawmakers.

In a major move, Trump’s executive order also precludes the Federal Reserve from issuing its own central bank digital currency (CBDC). This directive aligns with a broader trend, as countries like Nigeria, Jamaica, and the Bahamas have already launched their very own digital currencies. 

Moreover, 44 other nations, including Russia, China, Australia, and Brazil, are conducting pilot programs for digital currencies, in response to the Atlantic Council think tank.

Throughout, the push for a digital euro has develop into increasingly relevant, especially within the context of competitive pressures from stablecoins and other digital assets within the European Union. 

The ECB’s decision to maneuver forward with a digital euro could significantly reshape the banking landscape in Europe, ensuring that it stays competitive in an increasingly digital economy.

On the time of writing, the overall market capitalization of digital assets stands at $3.52 trillion, of which stablecoins have captured a portion of $215 billion, in response to DeFiLlama data.

Featured image from Bloomberg, chart from TradingView.com