Introduction
Cash and funds are being re-engineered for the digital age. Privately issued stablecoins – cryptocurrencies pegged to sure belongings – and central financial institution digital currencies (CBDCs) characterize competing but doubtlessly complementary types of digital cash that might assist facilitate a shift from centralised funds to decentralised finance (DeFi). This guarantees sooner, programmable and borderless funds, however stablecoins and CBDCs function on totally different ideas and institutional foundations, and mark a radical departure from the centralised structure that underpins trendy fee programs.
For the European Union, the stakes are unusually excessive. If dollar-denominated stablecoins (USD-SCs) proceed to develop globally whereas the euro space prioritises a CBDC and discourages euro-stablecoins (EUR-SCs), the EU dangers digital dollarisation, technological dependence and reputational injury, ought to the digital euro fail to realize traction. On this context, the EU ought to promote a hybrid fee system based mostly on the complementarity of CBDC, privately issued stablecoins and tokenised deposits.
DeFi: a technological shift
Fee programs proceed to relaxation on a system of hierarchical ledgers, managed by business banks and clearinghouses, that coordinate settlement by way of chains of intermediaries. Most cash is already digital, but it surely lives contained in the accounting programs of banks and might’t transfer with out going by way of fee networks. The EU’s fee infrastructure is among the many world’s most superior and built-in – much less fragmented than in the USA.
Nonetheless, many frictions inhibit the EU system. Sending cash outdoors the EU stays gradual and costly as a result of funds should move by way of a number of banks. For instance, when a small firm within the EU desires to pay a provider in Asia, even when each events use trendy on-line banking, the fee should journey by way of SWIFT and a number of correspondent banks. Every middleman takes a payment; compliance checks happen at each hop. Funds might arrive as much as 4 days later and can’t be tracked in actual time. Furthermore, not all fee programs ‘speak’ to one another, so cash that strikes immediately at retail stage can’t transfer as easily when giant establishments have to settle larger transactions. Lastly, good funds will not be doable: funds can’t mechanically comply with situations (equivalent to ‘pay solely when items arrive’), so intermediaries nonetheless have to manually coordinate and confirm the main points.
DeFi, in contrast, is constructed on distributed ledger expertise (DLT), changing central reconciliation with collective verification. Transactions are recorded on a shared ledger by way of cryptographic consensus, reaching settlement and not using a single level of management. DeFi’s technological benefits are well-established (BIS, 2023): programmability permits conditional transactions, transparency allows real-time auditing and interoperability reduces prices. These options clarify why DeFi ideas are being built-in into regulated finance.
DeFi’s openness, nevertheless, additionally brings fragility: code errors, governance dangers and cyber-vulnerabilities. The coverage problem is just not whether or not to undertake DeFi, however find out how to combine decentralised infrastructure right into a regulated framework that preserves belief.
Tokenised deposits and stablecoins are two of the choices for quick, programmable digital funds inside a decentralised system. However whereas tokenised deposits come from throughout the regulatory perimeter, stablecoins are outdoors it.
Tokenised deposits are the banking system’s personal model of digital cash, designed to modernise funds with out altering the underlying authorized construction of cash. Financial institution don’t create new cash when tokenised deposits – they challenge digital tokens that characterize a declare on the identical deposit account. The cash stays on the financial institution’s steadiness sheet precisely as earlier than. Tokens are totally regulated and guarded by deposit insurance coverage. They are often transferred immediately, utilized in good contracts or settled 24/7 on distributed ledgers.
Stablecoins, in contrast, are created by personal corporations to make it simpler to commerce on crypto markets, the place banks wouldn’t present fee providers. A stablecoin is a digital token designed to keep up a secure worth, often one-to-one with a serious forex. They’re backed by reserves of money or short-term securities.
CBDCs: the digital euro
CBDCs are digital equivalents of money – a direct declare on the central financial institution. Like banknotes and reserves, they’re state-guaranteed, risk-free and universally convertible, anchoring the financial system however not constituting its bulk.
Within the euro space, over 90 p.c of the cash provide (M3) is commercial-bank deposits and extremely liquid devices which can be shut substitutes for deposits, whereas lower than 10 p.c is money and reserves. A retail digital euro, which could possibly be first issued in 2029, can be unlikely to vary this steadiness, particularly if stablecoins and tokenised deposits ship quick, low-cost, programmable funds. The actual innovation frontier lies in tokenising business deposits and their shut substitutes – through stablecoins or tokenised deposits – whereas making certain convertibility into money and reserves.
CBDCs and stablecoins are thus not rivals: CBDCs present a public anchor of belief, whereas stablecoins and tokenised deposits present personal innovation and credit score elasticity. A well-functioning digital-money system ought to combine each layers and protect convertibility between them.
Stablecoins go mainstream
The overall worth of stablecoins in circulation in mid-2025 exceeded $275 billion, up from about $28 billion in 2020 (Duong and Basco, 2025). Transaction volumes reached $15 trillion within the first seven months of 2025, rivalling main fee networks. The highest issuers, Tether (USDT) and Circle (USDC), maintain over $120 billion in short-term US Treasuries (BIS, 2023). Stablecoins are thus one of many fastest-growing types of personal digital cash, although nonetheless modest relative to the trillions circulating within the banking system, and now underpin digital asset buying and selling, cross-border remittances and on-chain treasury operations.
In rising markets, dollar-denominated stablecoins more and more perform as a retailer of worth and medium of change. They thus lengthen the attain of the greenback by way of market innovation relatively than coverage design.
Conservative estimates, equivalent to J.P.Morgan’s, see stablecoins reaching round $500 billion by 2028, with development largely confined to crypto-financial purposes. Extra reasonable eventualities (Duong and Basco, 2025) envisage $1 trillion or extra by 2028–2033, assuming gradual integration into cross-border funds and digital-asset settlement. Bullish forecasts foresee a market of as much as $4 trillion market by 2030, pushed by institutional adoption, tokenised securities and new types of programmable finance.
Stablecoins are thus shifting from a crypto-native area of interest in direction of the sides of the mainstream monetary system. Their preliminary position as buying and selling collateral in DeFi and exchanges is being supplemented by company treasury purposes, settlement for tokenised belongings and remittance use in rising markets.
The danger for Europe: if USD-SCs dominate
If dollar-denominated stablecoins (USD-SCs) obtain scale whereas the euro space limits euro-denominated issuance and focuses solely on the digital euro, three structural dangers might come up:
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Massive-scale use of USD-SCs in European funds or commerce might result in personal dollarisation: financial exercise denominated and settled in digital {dollars} outdoors European Central Financial institution oversight. This might weaken the euro’s home position and complicate financial coverage transmission.
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USD-SCs, working on open programmable networks, are driving innovation in decentralised fee programs. If Europe confines experimentation to a centralised CBDC, it dangers ceding management over next-generation monetary infrastructure to the US and Asia, with penalties for digital sovereignty and competitiveness.
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If the digital euro is just not broadly taken up, whereas USD-SCs thrive, the ECB might face a credibility hole. With no launch anticipated earlier than 2029, the digital euro might arrive in a market through which USD-SCs stablecoins have already consolidated their dominance (see earlier part). Stablecoins will possible be way more entrenched – each technologically and in consumer adoption – lowering the ECB’s potential to form the brand new financial panorama. Furthermore, the home urge for food for a digital euro stays weak, elevating the query of whether or not the initiative dangers turning into extra of a distraction than a strategic asset. As an alternative of projecting financial sovereignty, a slow-moving and politically constrained digital euro might spotlight the distinction between a cautious Europe and a extra agile US ecosystem.
The US and EU share an rising custodial mannequin for stablecoins – each treating issuers as fee intermediaries that safeguard buyer funds, relatively than as deposit-takers or credit score intermediaries – but, the underlying regulatory philosophies diverge.
US regulators more and more argue that systemically necessary stablecoins ought to function throughout the perimeter of insured depository establishments or beneath equal prudential supervision: not that every one issuers should develop into banks however that large-scale fee stablecoins ought to meet bank-like requirements. These embody sturdy liquidity guidelines, capital necessities and doubtlessly entry to central financial institution liquidity services.
Within the EU, the 2023 Markets in Crypto-Property Regulation (MiCA, Regulation (EU) 2023/1114) establishes an analogous useful distinction by way of a two-track prudential framework. Non-bank issuers have to be licensed as Digital Cash Establishments (EMIs). They’re required to keep up 1:1 reserves in safe and low-risk belongings, segregate consumer funds and assure par-value redemption. They can not lend or have interaction in maturity transformation – that’s, they can not create credit score.
In contrast, EU banks might challenge stablecoins immediately beneath their banking licenses. Their stablecoin liabilities are topic to the identical prudential requirements – capital, liquidity and supervisory oversight – as their different liabilities. Whereas banks will not be certain by the reserve and segregation necessities imposed on EMIs, the underlying goal is equal: making certain full redeemability and systemic stability, whether or not by way of ringfenced backing (for EMIs) or bank-grade prudential safeguards (for banks).
Examples embody Société Générale’s CoinVertible (EURCV). Banco Santander and BBVA are experimenting with tokenised deposits.The EU method preserves the position of banks as the one central bank-backed monetary intermediaries. Nonetheless, it could additionally inhibit innovation: banks usually face technological inertia and discover it troublesome to combine blockchain-based programs into legacy infrastructure.
In contrast, the US mannequin dangers separating the lending perform from the deposit perform. If non-bank stablecoin issuers maintain reserves in Treasuries or at custodial banks, however don’t lengthen credit score, the consequence could possibly be a narrow-banking system that weakens the normal credit score channel by crowding out the normal banks in deposit gathering, thereby lowering the elasticity of cash creation and doubtlessly amplifying liquidity stress throughout downturns.
A possible hybrid system
As markets mature, the road between stablecoins and deposits will blur. If each compete for a similar pool of retail or institutional funds, prudential parity pressures will develop: related capabilities will demand related guidelines. In the meantime, some giant issuers will push in the other way, searching for higher flexibility to take a position reserves, lengthen credit score or entry central financial institution accounts immediately. Over time, this might yield a brand new hybrid class: digital full-reserve or ‘slim’ banks, bridging the custodial mannequin and conventional intermediation. In that case, the sensible distinction between the US and the EU fashions would cut back dramatically although not fully. The EU would combine digital cash beneath a public financial mandate, the US beneath a market-licensing regime.
Within the EU, such a system could possibly be based mostly on the complementarity of CBDC and privately issued stablecoins or tokenised deposits. A CBDC would act because the trusted settlement layer, whereas good contracts deal with automated funds, routing and compliance. Customers can maintain CBDC, stablecoins and tokenised deposits in the identical pockets and transfer between them seamlessly. Stablecoins would present world liquidity and 24/7 interoperability, whereas tokenised deposits would hold financial institution cash usable inside programmable environments: a multi-asset digital cash ecosystem with instantaneous, low-cost transactions, whereas sustaining regulatory oversight and monetary stability.
This might primarily be a two-tier construction through which one kind of entity would function as a slim financial institution, issuing totally backed, low-risk digital cash and holding solely secure belongings equivalent to reserves or authorities securities. One other set of entities would concentrate on credit score intermediation, offering loans funded by way of capital markets or non-bank sources.
This structure would quantity to a serious structural reform with each benefits and prices. Migration of funds into narrow-bank stablecoins might shrink the banking system’s deposit base and weaken lending to companies and different bank-dependent credit score channels. In the EU, the place regulation is constructed across the conventional mannequin of credit score establishments that mix deposit-taking with lending, an entire separation of those capabilities is unlikely. A extra practical path of partial lodging could possibly be taken, with regulators and the ECB imposing clearer segregation between fee liabilities and dangerous lending actions.
Nonetheless, financial stability might require all issuers of stablecoin to be granted entry to the security internet offered by central banks. The EU might acquire a strategic benefit by shifting on this course. Reserve-backed stablecoins would possible acquire a powerful benefit over tokenised deposits, stimulating funds innovation, enhancing the euro’s place in digital finance and enhancing monetary stability by changing dangerous collateral swimming pools with central-bank cash backing.
This might occur both by design or by necessity. When personal cash expands, central banks finally underwrite it. The eurodollar market ({dollars} held outdoors the US) of the Nineteen Fifties to Nineteen Seventies escaped US regulation however turned integral to world finance; Washington ultimately opted for cooperation (Eichengreen, 2019). Earlier than 2008, shadow banks created money-like liabilities and not using a security internet. When panic struck, the Federal Reserve prolonged liquidity and funding banks sought banking licences (Gorton and Metrick, 2012).
Stablecoin evolution might comply with the identical logic. As soon as they’ve develop into systemic, central banks must present liquidity and oversight. The lender-of-last-resort position is structural, not elective.
Conclusion
The EU faces a strategic alternative: to rely solely on a digital euro, making certain management however risking irrelevance, or to combine regulated personal cash – stablecoins – inviting innovation however demanding prudence. The broader shift towards tokenisation and digital settlement might allow a brand new type of two-tier construction of slim banks issuing totally backed, low-risk digital cash and holding solely secure belongings equivalent to reserves or authorities securities, whereas one other set of entities supplies loans funded by way of capital markets or non-bank sources. This might be a major transformation of the monetary system, carrying the chance of disintermediation of banks which, although it must be managed rigorously, might result in efficiency-enhancing competitors.
Such a system will solely obtain full credibility with ECB help.With out entry to ECB reserve services, no euro-stablecoin can actually be risk-free. Since stablecoins compete with deposits relatively than money, the impact on seignorage can be insignificant. Nonetheless, the central financial institution must tackle a bigger, extra structural position in cash creation and intermediation. This has occurred already on account of new rules and structural transformation for the reason that world monetary disaster.
Regardless of the monetary market configuration – public, personal or hybrid – the underlying fact stays that when personal cash turns into systemic, central-bank credibility and public belief nonetheless present its final collateral. The structure of cash might evolve, however its basis is not going to.
I thank Bertin Martens, Francesco Papadia and Jeromin Zettelmeyer for helpful feedback.
References
Anderson, J. and F. Papadia (2020) ‘Libra as Foreign money Board: Are the Dangers too Nice?’ Bruegel Weblog, 27 January, out there at https://www.bruegel.org/blog-post/libra-currency-board-are-risks-too-great
BIS (2023) ‘Blueprint for the Future Financial System: Enhancing the Outdated, Enabling the New’, in BIS Annual Financial Report 2023, Financial institution for Worldwide Settlements, out there at https://www.bis.org/publ/arpdf/ar2023e3.htm
Castrén, O. and R. Russo (2026) ‘Runs, Transparency and Rules: on the Optimum Design of Stablecoins Frameworks’, Financial Letters, 258: 112720, out there at https://doi.org/10.1016/j.econlet.2025.112720
Duong, D. and C. Basco (2025) ‘New Framework for Stablecoin Development’, Market Intelligence, Coinbase Institutional, out there at https://www.coinbase.com/institutional/research-insights/analysis/market-intelligence/new-framework-for-stablecoin-growth
Eichengreen, B. (2019) Globalizing Capital: A Historical past of the Worldwide Financial System, Princeton College Press
Gorton, G. and A. Metrick (2012) ‘Securitized Banking and the Run on Repo’, Journal of Monetary Economics 104(3): 425–451, out there at https://doi.org/10.1016/j.jfineco.2011.03.016
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