The European Union should embrace decentralised finance and make it safe

Introduction

Money and payments are being re-engineered for the digital age. Privately issued stablecoins – cryptocurrencies pegged to certain assets – and central bank digital currencies (CBDCs) represent competing yet potentially complementary forms of digital money that could help facilitate a shift from centralised payments to decentralised finance (DeFi). This promises faster, programmable and borderless payments, but stablecoins and CBDCs operate on different principles and institutional foundations, and mark a radical departure from the centralised architecture that underpins modern payment systems.

For the European Union, the stakes are unusually high. If dollar-denominated stablecoins (USD-SCs) continue to grow globally while the euro area prioritises a CBDC and discourages euro-stablecoins (EUR-SCs), the EU risks digital dollarisation, technological dependence and reputational damage, should the digital euro fail to gain traction. In this context, the EU should promote a hybrid payment system based on the complementarity of CBDC, privately issued stablecoins and tokenised deposits.

DeFi: a technological shift

Payment systems continue to rest on a system of hierarchical ledgers, managed by commercial banks and clearinghouses, that coordinate settlement through chains of intermediaries. Most money is already digital, but it lives inside the accounting systems of banks and can’t move without going through payment networks. The EU’s payment infrastructure is among the world’s most advanced and integrated – less fragmented than in the United States.

However, many frictions inhibit the EU system. Sending money outside the EU remains slow and expensive because funds must pass through several banks. For example, when a small company in the EU wants to pay a supplier in Asia, even if both parties use modern online banking, the payment must travel through SWIFT and multiple correspondent banks. Each intermediary takes a fee; compliance checks occur at every hop. Funds may arrive up to four days later and cannot be tracked in real time. Moreover, not all payment systems ‘talk’ to each other, so money that moves instantly at retail level can’t move as smoothly when large institutions need to settle bigger transactions. Finally, smart payments are not possible: payments cannot automatically follow conditions (such as ‘pay only when goods arrive’), so intermediaries still need to manually coordinate and verify the details.

DeFi, by contrast, is built on distributed ledger technology (DLT), replacing central reconciliation with collective verification. Transactions are recorded on a shared ledger through cryptographic consensus, achieving settlement without a single point of control. DeFi’s technological advantages are well-established (BIS, 2023): programmability allows conditional transactions, transparency enables real-time auditing and interoperability reduces costs. These features explain why DeFi principles are being integrated into regulated finance.

DeFi’s openness, however, also brings fragility: code errors, governance risks and cyber-vulnerabilities. The policy challenge is not whether to adopt DeFi, but how to integrate decentralised infrastructure into a regulated framework that preserves trust.

Tokenised deposits and stablecoins are two of the options for fast, programmable digital payments within a decentralised system. But while tokenised deposits come from within the regulatory perimeter, stablecoins are outside it.

Tokenised deposits are the banking system’s own version of digital money, designed to modernise payments without changing the underlying legal structure of money. Bank do not create new money when tokenised deposits – they issue digital tokens that represent a claim on the same deposit account. The money stays on the bank’s balance sheet exactly as before. Tokens are fully regulated and protected by deposit insurance. They can be transferred instantly, used in smart contracts or settled 24/7 on distributed ledgers. 

Stablecoins, by contrast, are created by private companies to make it easier to trade on crypto markets, where banks would not provide payment services. A stablecoin is a digital token designed to maintain a stable value, usually one-to-one with a major currency. They are backed by reserves of cash or short-term securities¹.

CBDCs: the digital euro

CBDCs are digital equivalents of cash – a direct claim on the central bank. Like banknotes and reserves, they are state-guaranteed, risk-free and universally convertible, anchoring the monetary system but not constituting its bulk.

In the euro area, over 90 percent of the money supply (M3) is commercial-bank deposits and highly liquid instruments that are close substitutes for deposits, while less than 10 percent is cash and reserves. A retail digital euro, which could be first issued in 2029², would be unlikely to change this balance, especially if stablecoins and tokenised deposits deliver fast, low-cost, programmable payments. The real innovation frontier lies in tokenising commercial deposits and their close substitutes – via stablecoins or tokenised deposits – while ensuring convertibility into cash and reserves.

CBDCs and stablecoins are thus not rivals: CBDCs provide a public anchor of trust, while stablecoins and tokenised deposits provide private innovation and credit elasticity³. A well-functioning digital-money system should integrate both layers and preserve convertibility between them.

Stablecoins go mainstream

The total value 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 in the first seven months of 2025, rivalling major payment networks. The top issuers, Tether (USDT) and Circle (USDC), hold over $120 billion in short-term US Treasuries (BIS, 2023). Stablecoins are thus one of the fastest-growing forms of private digital money, though still modest relative to the trillions circulating in the banking system, and now underpin digital asset trading, cross-border remittances and on-chain treasury operations.

In emerging markets, dollar-denominated stablecoins increasingly function as a store of value and medium of exchange. They thus extend the reach of the dollar through market innovation rather than policy design.

Conservative estimates, such as J.P.Morgan’s, see stablecoins reaching around $500 billion by 2028, with growth largely confined to crypto-financial applications⁴. More moderate scenarios (Duong and Basco, 2025)⁵ envisage $1 trillion or more by 2028–2033, assuming gradual integration into cross-border payments and digital-asset settlement. Bullish forecasts⁶ foresee a market of up to $4 trillion market by 2030, driven by institutional adoption, tokenised securities and new forms of programmable finance.

Stablecoins are thus moving from a crypto-native niche towards the edges of the mainstream financial system. Their initial role as trading collateral in DeFi and exchanges is being supplemented by corporate treasury applications, settlement for tokenised assets and remittance use in emerging markets.

The risk for Europe: if USD-SCs dominate

If dollar-denominated stablecoins (USD-SCs) achieve scale while the euro area limits euro-denominated issuance and focuses solely on the digital euro, three structural risks could arise:

1. Large-scale use of USD-SCs in European payments or trade could lead to private dollarisation: economic activity denominated and settled in digital dollars outside European Central Bank oversight. This would weaken the euro’s domestic role and complicate monetary policy transmission⁷.

2. USD-SCs, operating on open programmable networks, are driving innovation in decentralised payment systems. If Europe confines experimentation to a centralised CBDC, it risks ceding control over next-generation financial infrastructure to the US and Asia, with consequences for digital sovereignty and competitiveness.

3. If the digital euro is not widely taken up, while USD-SCs thrive, the ECB could face a credibility gap⁸. With no launch expected before 2029, the digital euro could arrive in a market in which USD-SCs stablecoins have already consolidated their dominance (see previous section). Stablecoins will likely be far more entrenched – both technologically and in user adoption – reducing the ECB’s ability to shape the new monetary landscape. Moreover, the domestic appetite for a digital euro remains weak, raising the question of whether the initiative risks becoming more of a distraction than a strategic asset. Instead of projecting monetary sovereignty, a slow-moving and politically constrained digital euro could highlight the contrast between a cautious Europe and a more agile US ecosystem.

The US and EU share an emerging custodial model for stablecoins – both treating issuers as payment intermediaries that safeguard customer funds, rather than as deposit-takers or credit intermediaries – yet, the underlying regulatory philosophies diverge.

US regulators increasingly argue that systemically important stablecoins should operate within the perimeter of insured depository institutions or under equivalent prudential supervision⁹: not that all issuers must become banks but that large-scale payment stablecoins should meet bank-like standards. These include robust liquidity rules, capital requirements and potentially access to central bank liquidity facilities.

In the EU, the 2023 Markets in Crypto-Assets Regulation (MiCA, Regulation (EU) 2023/1114) establishes a similar functional distinction through a two-track prudential framework. Non-bank issuers must be licensed as Electronic Money Institutions (EMIs). They are required to maintain 1:1 reserves in secure and low-risk assets, segregate client funds and guarantee par-value redemption. They cannot lend or engage in maturity transformation – that is, they cannot create credit.

By contrast, EU banks may issue stablecoins directly under their banking licenses. Their stablecoin liabilities are subject to the same prudential standards – capital, liquidity and supervisory oversight – as their other liabilities. While banks are not bound by the reserve and segregation requirements imposed on EMIs, the underlying objective is equivalent: ensuring full redeemability and systemic stability, whether through ringfenced backing (for EMIs) or bank-grade prudential safeguards (for banks).

Examples include Société Générale’s CoinVertible (EURCV)¹⁰. Banco Santander and BBVA are experimenting with tokenised deposits¹¹.The EU approach preserves the role of banks as the only central bank-backed financial intermediaries. However, it may also inhibit innovation: banks often face technological inertia and find it difficult to integrate blockchain-based systems into legacy infrastructure.

By contrast, the US model risks separating the lending function from the deposit function. If non-bank stablecoin issuers hold reserves in Treasuries or at custodial banks, but do not extend credit, the result could be a narrow-banking system that weakens the traditional credit channel by crowding out the traditional banks in deposit gathering, thereby reducing the elasticity of money creation and potentially amplifying liquidity stress during downturns.

A potential hybrid system 

As markets mature, the line between stablecoins and deposits will blur. If both compete for the same pool of retail or institutional funds, prudential parity pressures will grow: similar functions will demand similar rules. Meanwhile, some large issuers will push in the opposite direction, seeking greater flexibility to invest reserves, extend credit or access central bank accounts directly. Over time, this could yield a new hybrid category: digital full-reserve or ‘narrow’ banks, bridging the custodial model and traditional intermediation. In that case, the practical difference between the US and the EU models would reduce dramatically though not entirely. The EU would integrate digital money under a public monetary mandate, the US under a market-licensing regime.

In the EU, such a system could be based on the complementarity of CBDC and privately issued stablecoins or tokenised deposits. A CBDC would act as the trusted settlement layer, while smart contracts handle automated payments, routing and compliance. Users can hold CBDC, stablecoins and tokenised deposits in the same wallet and move between them seamlessly. Stablecoins would provide global liquidity and 24/7 interoperability, while tokenised deposits would keep bank money usable inside programmable environments: a multi-asset digital money ecosystem with instant, low-cost transactions, while maintaining regulatory oversight and financial stability.

This would essentially be a two-tier structure in which one type of entity would operate as a narrow bank, issuing fully backed, low-risk digital money and holding only safe assets such as reserves or government securities. Another set of entities would focus on credit intermediation, providing loans funded through capital markets or non-bank sources.

This architecture would amount to a major structural reform with both advantages and costs. Migration of funds into narrow-bank stablecoins could shrink the banking system’s deposit base and weaken lending to businesses and other bank-dependent credit channels. In the EU, where regulation is built around the traditional model of credit institutions that combine deposit-taking with lending, a complete separation of these functions is unlikely. A more realistic path of partial accommodation could be taken, with regulators and the ECB imposing clearer segregation between payment liabilities and risky lending activities.

However, monetary stability may require all issuers of stablecoin to be granted access to the safety net provided by central banks. The EU could gain a strategic advantage by moving in this direction. Reserve-backed stablecoins would likely gain a strong advantage over tokenised deposits, stimulating payments innovation, enhancing the euro’s position in digital finance and improving financial stability by replacing risky collateral pools with central-bank money backing.

This could happen either by design or by necessity. When private money expands, central banks ultimately underwrite it. The eurodollar market (dollars held outside the US) of the 1950s to 1970s escaped US regulation but became integral to global finance; Washington eventually opted for cooperation (Eichengreen, 2019). Before 2008, shadow banks created money-like liabilities without a safety net. When panic struck, the Federal Reserve extended liquidity and investment banks sought banking licences (Gorton and Metrick, 2012).

Stablecoin evolution may follow the same logic. Once they have become systemic, central banks will have to provide liquidity and oversight. The lender-of-last-resort role is structural, not optional.

Conclusion

The EU faces a strategic choice: to rely solely on a digital euro, ensuring control but risking irrelevance, or to integrate regulated private money – stablecoins – inviting innovation but demanding prudence. The broader shift toward tokenisation and digital settlement could enable a new kind of two-tier structure of narrow banks issuing fully backed, low-risk digital money and holding only safe assets such as reserves or government securities, while another set of entities provides loans funded through capital markets or non-bank sources. This would be a significant transformation of the financial system, carrying the risk of disintermediation of banks which, though it would have to be managed carefully, could lead to efficiency-enhancing competition.

Such a system will only achieve full credibility with ECB support.Without access to ECB reserve facilities, no euro-stablecoin can truly be risk-free. Since stablecoins compete with deposits rather than cash, the effect on seignorage would be insignificant. However, the central bank will have to take on a larger, more structural role in money creation and intermediation. This has happened already as a result of new regulations and structural transformation since the global financial crisis.

Whatever the financial market configuration – public, private or hybrid – the underlying truth remains that when private money becomes systemic, central-bank credibility and public trust still provide its ultimate collateral. The architecture of money may evolve, but its foundation will not.

I thank Bertin Martens, Francesco Papadia and Jeromin Zettelmeyer for useful comments.

References

Anderson, J. and F. Papadia (2020) ‘Libra as Currency Board: Are the Risks too Great?’ Bruegel Blog, 27 January, available at https://www.bruegel.org/blog-post/libra-currency-board-are-risks-too-great

BIS (2023) ‘Blueprint for the Future Monetary System: Improving the Old, Enabling the New’, in BIS Annual Economic Report 2023, Bank for International Settlements, available at https://www.bis.org/publ/arpdf/ar2023e3.htm

Castrén, O. and R. Russo (2026) ‘Runs, Transparency and Regulations: on the Optimal Design of Stablecoins Frameworks’, Economic Letters, 258: 112720, available at https://doi.org/10.1016/j.econlet.2025.112720

Duong, D. and C. Basco (2025) ‘New Framework for Stablecoin Growth’, Market Intelligence, Coinbase Institutional, available at https://www.coinbase.com/institutional/research-insights/research/market-intelligence/new-framework-for-stablecoin-growth

Eichengreen, B. (2019) Globalizing Capital: A History of the International Monetary System, Princeton University Press

Gorton, G. and A. Metrick (2012) ‘Securitized Banking and the Run on Repo’, Journal of Financial Economics 104(3): 425–451, available at https://doi.org/10.1016/j.jfineco.2011.03.016