The Geopolitics of Stablecoins
Why European monetary sovereignty is at stake. A commentary by Lorenzo Bini Smaghi
European household savings are once again a source of concern. A year after the publication of the Draghi and Letta reports—both highlighting how the lack of a more integrated European financial market benefits the US economy at the expense of Europe—the situation has, if anything, worsened.
Not only have various European authorities erected further barriers to the creation of a true capital market, particularly by blocking the emergence of systemically important banking institutions, but Europe is also failing to recognise the tsunami heading its way from across the Atlantic. The newly adopted so-called GENIUS legislation from the Trump Administration aims to promote the use of the dollar through blockchain technology, directly undermining other currencies.
Unless Europe reacts swiftly, the consequences for its monetary sovereignty could be severe.
There are three essential realities European policymakers must confront.
First: We are in the midst of a technological revolution with the potential to upend previous systems entirely. Initial scepticism is understandable. For those accustomed to centralised monetary systems—where payments are finalised only after a series of operations conducted via private and public institutions, as in the case of a bank transfer—it is not easy to accept that a decentralised blockchain-based system allows for transactions to be settled in near real-time.
Stablecoins—unlike volatile cryptocurrencies such as bitcoin—enable 24/7, cost-free payments to counterparties worldwide, settling invoices, purchasing financial instruments, or making remittances. All that is required is a digital wallet, interoperable with the most common blockchains, which are themselves becoming increasingly interconnected. Each wallet has a public identifier—a sort of digital IBAN—that counterparties can use to complete real-time transactions.
Wallets are loaded with stablecoins, purchased via a simple bank transfer, and then used for payments. These transactions are encrypted, providing privacy, yet traceable by authorities when needed, for example to combat money laundering.
Second: The spread of stablecoins introduces challenges, some already identified by monetary authorities. Chief among these is ensuring stablecoin value. In principle, stability is guaranteed by 100% reserves held by the issuer, similar to the “narrow banking” concept. Regulation restricts the use of these reserves to highly liquid instruments and sets out withdrawal terms.
But there remains the risk that issuers might not comply, especially if they are domiciled in jurisdictions with lax oversight. The solution is to place stablecoin issuers under the supervision of the monetary authorities in their country of issuance—meaning the United States, in the case of dollar-based stablecoins.
While current US regulation does not require this, it is a natural market evolution. Notably, one of the best-known issuers, Circle, whose valuation recently soared from $6 to $50 billion in a matter of days, has sought a US banking license. It already promotes itself as the largest regulated stablecoin issuer.
Third: This technology is coming to Europe—indeed, it is already here, albeit spreading more slowly than in the US. If stablecoins are issued only by US entities, and only in dollars, they will inevitably be used by European businesses and citizens. This cannot be prevented.
The result would be a massive outflow of bank deposits from the continent, used to finance US Treasury securities held as reserves by stablecoin issuers.
In short, trying to halt the spread of this technology is not only futile, but also harmful.
The lesson for Europe is clear: it must take the lead in adopting these new technologies.
Fortunately, the EU has established a solid regulatory foundation—namely, the MiCA framework—which enables European actors to issue euro-denominated stablecoins with robust consumer protections, particularly regarding reserve composition and regulatory oversight.
Now, it falls to the monetary authorities, above all the ECB, to overcome initial reluctance and encourage the issuance of euro stablecoins that can circulate globally and compete with their dollar-based counterparts.
Unfortunately, the central bank digital currency—the so-called digital euro, expected by 2028—is no real alternative. Its technology simply cannot compete with blockchain in terms of cost, versatility, reach, and transaction speed. Nor can the ECB reasonably be expected to become a software company.
Europe’s financial system—starting with its banks—cannot always wait for public authorities to lead the way on innovation. The fear that stablecoins may cannibalise more profitable services in the short term cannot be allowed to trump the benefits this technology brings to customers, especially if Europe wants those customers to remain.
Without a rapid, competitive European response to America’s initiative, Europe’s financial system risks becoming even more of a colony than it already is.
A first version of this article was published in the Italian daily Il Foglio
IEP@BU does not express opinions of its own. The opinions expressed in this publication are those of the authors. Any errors or omissions are the responsibility of the authors.
