The European Central Bank needs to be competitive in cross-border payments. There must be a correction in Europe’s high dependence on non-European payment services, according to the ECB.
The European Central Bank (ECB) is against stablecoins and other digital currencies, such as Facebook’s Libra, that Big Techs issue. The institution believes that these assets are a risk for the maintenance of its financial policies and that they could eventually compete with the euro.
It also considers that the digitization of the economy has allowed the development of easier-to-use instant payment solutions. For this reason, they invite the banks in the region to collaboratively design a response in this regard.
François Villeroy de Galhau, the governor of the Bank of France, warned that a third actor would emerge within the traditional financial system as a consequence of stablecoins and other digital currencies. In the conventional model, only two entities are capable of printing money: central banks and commercial banks.
The issuance of stablecoins “does not offer the same guarantees in terms of credit risk, liquidity, continuity of service and neutrality” as commercial or central bank money, according to Villeroy. However, their considerable facilities for cross-border payments lead him to believe that they will not disappear from the market.
Until quite recently, the European Central Bank has applied its financial policies by issuing cash. However, the COVID-19 crisis has caused an increase in cashless transactions and the use of commercial money.
The governor of the Bank of France considers that central banks must design a joint strategy to address these issues: the deficiency in cross-border payments, the issuance of cryptocurrencies and stablecoins by Big Techs, the development of a European payment initiative, and the potential benefits of a central bank digital currency (CBDC).
Stablecoin Scenarios for European Banking
Villeroy thinks that Big Techs could take advantage of their global reach to build a private financial infrastructure and a “monetary” system that competes with public monetary sovereignty. This situation would position themselves as issuers and managers of universal “currencies” (stablecoins), which would make the CBDC simply an endorsement of those “currencies.”
The official also believes that some jurisdictions would consider responding to the wave of private payments by issuing and distributing their CBDCs worldwide, like in the case of China. This could set precedents in terms of the characteristics of CBDCs and their articulation with private projects, leaving other central banks without a voice.
Technology and Innovation as a Symbol of Power
Villeroy stated that “digital payment solutions are a proof that the European financial system has become critically dependent on non-European actors.” These include credit card providers such as Visa and MasterCard, Big Techs such as Facebook and Amazon, and decentralized solutions such as Bitcoin and DeFi.
In this scenario, the ECB has little control over business continuity, technical and commercial decision-making, as well as data protection, use, and storage. This situation causes extremely strong concerns in Europe.
Discussions on cross-border payments have not had this institutional framework in Latin America. However, many people make international payments through US financial entities, which serve as intermediary banks.
At least in terms of remittances and cross-border transactions, the highest adoption of stablecoins and other cryptocurrencies is in Latin America. Unlike Europe, Latin America could innovate in this regard, or its Central Banks could take the first step in transforming the region’s financial system.
By Alexander Salazar