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A member of the European Central Bank’s (ECB) executive board has said that private stablecoins, such as the one launched by PayPal last month, strengthen the case for a digital euro.
“Europe should not shy away from being ambitious in developing an instrument that serves the public interest by making Europe and the euro fit for the digital age,” said the ECB’s Fabio Panetta.
Speaking at a European Parliament committee hearing on Monday (September 4), Panetta added that the eurozone’s digital fiat will strengthen the bloc’s “autonomy and resilience”, and will reduce its dependence on non-European providers.
Panetta singled out PayPal’s stablecoin, which is currently available only in the US, as a potential threat to innovation and competition.
“Private providers of payment services, including PayPal, have no incentive to limit the take-up of their stablecoins or the range of services they provide,” he said.
“Quite the opposite: their objective is to expand their customer base and gain market share.
Although such providers may lack an incentive to make their solutions compatible with other payment methods, they may gain scale quickly by offering them at a lower cost, said Panetta.
Additionally, in today’s current high-interest rate environment, they can generate additional revenue by re-investing reserve assets.
“While the market entry of bigtechs 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,” the ECB executive said.
This argument strongly resembles central banker concerns over sovereignty and customer protection in 2020 when Meta was working toward issuing Libra, its own stablecoin.
Although the social media giant eventually ditched the project, European MEP Eero Heinäluoma told Vixio that the EU’s Markets in Crypto-Assets (MiCA) legislation was “to a large extent” inspired by the threat of Libra and other private stablecoins.
PayPal is different from Libra in many respects. For instance, PayPal operates as a bank in the EU, using a Luxembourg banking licence, and it has 435m users, or roughly one-fifth of the 2bn user base that Facebook had in 2020.
However, PayPal may still pose a threat to the EU’s monetary sovereignty, according to Panetta.
“Our response to the technological revolution in payments cannot be to stand still.”
Digital euro to the rescue
A world of private stablecoins and no digital euro would not be “a benign status quo”, said Panetta.
Without a digital euro, he said, private actors in the payments market may become dominant, which could have “a strong impact” on the financial sector.
“Just like electricity or water, everyday payments are an essential service,” said Panetta. “We should not leave it to the private sector alone, including bigtechs, to provide such services.”
The ECB executive emphasised that the digital euro represents “an opportunity, not a risk” for the European financial sector.
Pierluigi Cuccuru, senior associate at De Matteis Law, told Vixio that it remains to be seen whether the digital euro will “erode the market share of non-European players”, or whether it will “eat from domestic schemes, instant payments solutions and cash.”
As reported by Vixio, the EU unveiled its Single Currency Package in late June, making it one of the first large economies to lay out a legislative framework for a central bank digital currency (CBDC).
Policymakers have since insisted that the digital euro will not replace either cash or private money. It will complement them while preserving people’s freedom to choose how they want to pay.
Echoing these principles, Panetta said the digital fiat will offer an electronic means of payment that is “available to everyone, everywhere, free of charge, while guaranteeing the highest level of privacy in digital payments”.
Just like with other digital payment methods, the Eurosystem would not be able to see the personal details of digital euro users or connect any payment information to private individuals. It would be banks and payment service providers (PSPs) that would onboard customers and ensure compliance.
“We are designing it as a safe payment tool in order to preserve the role of public money, while balancing innovation in payments with the stability of the financial sector and guaranteeing privacy,” said Panetta.
The digital fiat will be available via existing bank apps, and could be used everywhere in the eurozone.
Although EU legislators say the main goal is to provide consumers with more choice and banks with yet another rail to compete in payments, Cuccuru said it is essential that competition happens on fair conditions, based on free market principles.
“Much depends on how far regulators will go in steering the digital euro compensation model, for instance when setting fee caps,” he said.
In his speech, Panetta said the digital euro proposal achieves “a good balance” between the pricing objectives of both the public and private sectors.
“End users could use basic services of the digital euro free of charge, while intermediaries would be compensated in a similar way as for comparable private digital means of payment.”
Meanwhile, merchants “would be protected from any excessive fees that could result from the obligation to accept digital euro as legal tender”.
Panetta said the introduction of the digital euro would “pay due attention to orderly adjustments in the financial sector” while offering PSPs a platform for innovations “with pan-euro area reach”.
