The debate on the digital euro now has names and surnames, but what really interests us are the contrasting visions, which are essentially two.
The problem stems from the US decision to liberalize the market for dollar-pegged stablecoins through a series of regulatory acts, the most famous of which is the Genius Act, which we discussed in our in-depth analysis on July 25.
The discussion is taking place among the finance ministers of the old continent, where, on the one hand, there are those who would like to accelerate the introduction of the digital euro to counter both the monopoly of American credit card circuits and the development of dollar-pegged stablecoins. Supporters of the digital euro are firmly opposed to an American-style solution, i.e., the creation of stablecoins pegged to the euro and managed by private companies, because they argue that this could lead to financial instability, without, however, specifying in detail the key variables and forces responsible for this instability. They consistently argue that every digital euro must be backed by a fiat euro issued by the ECB.
On the other hand, there are those who oppose this view, arguing that the digital euro project in CBDC format should be abandoned immediately and for the future in favor of a solution based on the model adopted by the US, and that this should be done quickly. The strong argument of this faction is that the CBDC solution is by no means a guarantee of financial stability, otherwise there would be no discussion of holding limits. And this is indeed a significant point. The project envisages that the digital euro will be distributed through the banking channel and linked to fiat euro deposits (perhaps even highly liquid short-term securities). Let’s imagine that these deposits can be converted entirely into digital euros. In this scenario, holders would find themselves with a credit towards the ECB, which is the only institution authorized to guarantee the issuance of digital euros. This model leaves itself open to the risk of a run on the banks in the event of financial turmoil, because digital euros could be stored in personal wallets, removing them from the banking system, which would then find itself in difficulty. On the other hand, even with fiat euros, there could be a “run on the banks,” but the banknotes withdrawn would have to be kept “under the [proverbial] mattress”. With the digital euro, the “mattress” would become a wallet and therefore easier to store in a protected (and relatively secure) “place.” This is why there is talk of holding limits, with the dilemma that limits that are too low would discourage the holding of digital euros and thresholds that are too high would increase the risk of a “run on the banks.”
And this is not the only compromise that raises doubts. Another conflicting aspect lies in the reasoned solution that openly conflicts with the haste dictated by the risk of “missing the boat” of digital market development, for which digital currency is the ticket and therefore of fundamental importance.
Disclaimer
This post expresses the personal opinion of the Custodia Wealth Management staff who wrote it. It is not investment advice or personalized advice and should not be considered an invitation to carry out transactions on financial instruments.
