Battleground Shapes up in Europe: Digital Euro and Central Banks vs Private Stablecoin Issuers

In Europe, the digital currency battleground is shaping up to be one where the central banks are on one side, and private issuers are on the other.

And it may be the case that, as a result, stablecoins face the headwinds of adoption in fragmented landscape — adopted in some regions of the world, hobbled elsewhere.

In a speech Monday (Sept. 4), European Central Bank (ECB) executive board member Fabio Panetta took note that “private closed-loop solutions are becoming increasingly prevalent” in payments, signaling at least some risk to traditional financial services models.

In Panetta’s telling of it, private payment service providers can and will look to gain payments “market share” as they expand their customer bases.

Competition Hampered?

“While the market entry of big techs or other large payment providers may initially promote innovation, competition could be severely hampered if they attain a monopolistic position, as we have seen in other digital sectors,” Panetta stated, adding elsewhere in the speech that “In the absence of a digital euro, the emergence of potentially dominant private actors in the digital payments market could have a strong impact on the financial sector.”

And he pointed to PayPal’s announcement that it would launch its own U.S. dollar-denominated stablecoin as a key example of movements the private sector is making in the digital payments realm.

As reported here, PayPal last month said that its PayPal USD is “designed to contribute to the opportunity stablecoins offer for payments and is 100% backed by U.S. dollar deposits, short-term U.S Treasuries and similar cash equivalents,” per a news release. The stablecoin will enable customers to fund purchases with PayPal USD by choosing it at checkout, and will convert any of the cryptocurrencies supported by PayPal to and from PayPal USD.

The stablecoin market, to be sure, has been a volatile one, and there have been instances where dollar-pegged coins have “broken the buck” and fallen below 1:1 parity. In recent days, as an example of that volatility, Tether’s USDT market cap fell 1.2% to $82.9 billion in August, and data show that stablecoins’ market cap, as an industry in total, shrank for a 17th consecutive month, falling 0.4% to around $125 billion.

Though the conventional wisdom might be that CBDCs and stablecoins can co-exist, Panetta’s comments hint at a determination by the central banks in Europe that private issuers are, in effect, competition. The evolving regulatory landscape on the Continent also has eyed limiting larger stablecoin issuers to a reported the equivalent of $220 million in transactions daily.  Those (and other) limitations could lead to fragmented ecosystems for stablecoin-related commerce.

PayPal, of course, is an international ecosystem, as shown in its most recent quarterly report, where international revenues were up 5% on a currency-neutral basis, year on year. Cross-border transaction processing volumes (TPV) were up 3% to $47 billion, representing 12% of TPV.