Global stablecoins signal the need for change, but they can pose serious risks, says Executive Board member Fabio Panetta. We should remain open to global competition to foster innovation, but we should first ensure that we are prepared to make the most of it.
The payments industry is undergoing a digital transformation, and this transformation is accelerating. We can now pay with cards that are stored in our mobile wallets, ready for a transaction to be initiated at the touch of a button. Mobile payment apps allow us to easily pay or send money to friends.New services based on application programming
interfaces, such as payment initiation services, are expanding
consumers’ choice of e-commerce payments.
Fintechs have sparked
the latest wave of innovation. In a recent survey by the European System
of Central Banks, over 200 new payment solutions were reported, of
which more than one-third were provided by start-ups.
New
providers have progressively shifted their business models from
fee-based to data-driven, where payment services are provided free of
charge in exchange for personal data that offer deep insights into
users’ preferences.
The global technology firms – the so-called
big techs – are using this model to leverage their large customer base
and expand in global markets. Thanks to their global footprint, they are
uniquely positioned to offer services in the area of global
cross-border transactions, where current solutions are low quality and
expensive.
This is the backdrop against which stablecoins have
emerged. They could be used by the big techs to offer innovative payment
solutions that work both within and across national borders. While
stablecoin initiatives are still in their infancy, they should be
carefully analysed as they could radically transform the payments
landscape.
Today, I will discuss the potential advantages and
risks of stablecoins, and their implications for the payments market,
the financial sector and the overall economy. I will then turn to the
forward-looking policies that are needed to steer innovation towards
welfare-enhancing outcomes.
Two sides of the same (stable)coin
Stablecoins
are digital units of value designed to minimise fluctuations in their
price against a reference currency or basket of currencies.
To this end, some stablecoin initiatives pledge to hold a reserve of
State-issued currencies or other assets against which stablecoin
holdings can be redeemed or exchanged. Stablecoins became the subject of
heated debate last year, after the technology giant Facebook and its
partners announced their own global stablecoin, Libra.
Global stablecoins are initiatives which aim to achieve a global footprint,
without necessarily relying on existing payment schemes and clearing
and settlement arrangements. For example, Libra is an integrated
construct that simultaneously encompasses a new settlement asset, a new
payment rail and new end-user solutions.
Global stablecoins could
drive further innovation in payments, responding to the need for
cross-border payments and remittances that are more efficient and
cheaper. Indeed, the Financial Stability Board has proposed a roadmap to
enhance cross-border payments that recognises a role for sound global
stablecoin arrangements.
The flip side of stablecoins is the host of risks they can pose to our social and economic life.
For
example, data-driven models could pose a risk of misuse of personal
information for commercial or other purposes, which could jeopardise
privacy and competition and harm vulnerable groups. Another concern is
that wide acceptance of stablecoins offered by foreign companies would
make European payments dependent on technologies designed and governed
elsewhere. This could raise potential issues of traceability in the
fight against money laundering, terrorist financing and tax evasion. It
could also make the European payment system unfit to support our Single
Market and single currency and vulnerable to external disruption, such
as cyberattacks.
Risks to financial stability and monetary sovereignty
Other
risks involve the monetary and financial system. In fact stablecoins,
if widely adopted, could threaten financial stability and monetary
sovereignty.
As
I mentioned earlier, stablecoin issuers often promise that their
stablecoins can be converted into fiat currencies. But this promise
generally differs significantly from the convertibility mechanism for
bank deposits or e-money.
In the case of bank deposits,
one-to-one convertibility to the fiat currency is safeguarded by deposit
insurance schemes and prudential regulation and supervision. The value
and safety of e-money holdings are protected by the fact that e-money
issuers must hold customer funds in custody by third parties.
These
safeguards may not apply to stablecoins, which are therefore vulnerable
to runs. If the issuer does not guarantee a fixed value, the price of
the stablecoin will vary with the value of the reserve assets, and a run
could occur whenever users – who bear all the risks – expect a decrease
in the redemption price of the stablecoin. But a run could also occur
if issuers do guarantee a fixed value of the stablecoin, if they are
perceived as being incapable of absorbing losses.
Moreover, the
need to cover redemptions could force the stablecoin issuer to liquidate
assets, generating contagion effects throughout the entire financial
system. In the case of a global stablecoin, this would affect multiple
markets at once.
The payment network of a systemic stablecoin
arrangement could also be a source of instability. Stablecoin
arrangements are payment systems, insofar as they permit the transfer of
value between stablecoin holders. Moreover, stablecoin arrangements can
qualify as a payment scheme.
Just like any other payment system or scheme, if liquidity, settlement,
operational and cyber risks are not properly managed, they may threaten
the functioning of stablecoin arrangements and lead to systemic
instability.
Large investments in safe assets by stablecoin
issuers could have implications for monetary policy. By affecting the
availability of safe assets, these issuers could influence the level and
volatility of real interest rates, with potentially undesirable
consequences for financial conditions from a monetary policy
perspective. Market functioning could also be negatively affected.
Furthermore, to the extent that stablecoins are used as a store of
value, a large shift of bank deposits to stablecoins may influence
banks’ operations and the transmission of monetary policy.
Extreme
scenarios are probably not around the corner. Under current conditions,
the reserve assets of the stablecoin issuers would be remunerated
negatively,
so non-interest-bearing stablecoins would hardly be viable unless they
were subsidised by the issuer. We must nonetheless remain alert to
possible developments that may affect how a central bank exercises its
core mandate.
Risks would seemingly be mitigated by allowing
stablecoin issuers to deposit funds in accounts at the central bank.
This would eliminate custody and investment risks for stablecoins and
underpin their issuers’ commitment to redemption at par value into fiat
currencies.
But other fundamental problems would then emerge. In
fact, the perceived safety of a private settlement asset – the
stablecoin – would come at the risk of relegating other settlement
assets, especially public assets, to a minor role. A large take-up of
stablecoins could replace sovereign money – a public good offered for
centuries by the State to its citizens – with a “club good”, whereby
payment services are offered to a select group of people in exchange for
platform membership and personal data.
This would not be
acceptable. The function of sovereign money reflects citizens’ need for
safety and their trust in the State. Central banks offer sovereign money
to all citizens, and manage it in the public interest. Citizens should
not have to choose between the convenience of their favourite apps and
devices and safety, of which central bank money remains the highest
expression. And we should safeguard the sovereignty of public money.
Market structure, competitiveness and technological autonomy
Stablecoins
would profit from the comparative advantages that characterise big tech
business models and their control of large platforms. They could
therefore amplify the risks inherent to big tech’s expansion in the
payments market.
The
advantages of big tech firms are largely based on the control of
crucial infrastructure for commerce and economic activity across Europe –
from online marketplaces to social media and mobile technologies.
If access to this infrastructure by third-party payment solutions were
unduly restricted to benefit a stablecoin issuer, competition and
consumer choice might be harmed. Furthermore, big techs may discourage
investment by firms that are prone either to sweeping competition or
acquisition.
As
I mentioned earlier, there is also a risk of global stablecoin issuers
being handed the keys to vast amounts of personal data sitting on big
tech platforms. Besides raising data privacy concerns,
this could become a powerful vehicle to transmit market power from one
market to another, especially in the provision of financial services.
Ultimately,
entrusting foreign providers with the control of large pools of
personal data could entail significant costs for both EU citizens and
firms. The issues at stake range from data security and compliance with
EU data protection law to cutting off the lifeblood of European
financial innovation.
From analysis to policy
European
authorities need to respond to the ongoing transformation of the
European payments landscape and to the potential expansion of large
foreign players by promoting a competitive and innovative market and
completing the regulatory and oversight framework.
In order to
contribute to reaching these objectives, the Eurosystem is implementing a
comprehensive policy based on complementary elements.
The first
element is the Eurosystem retail payments strategy. It pursues
objectives such as promoting pan-European initiatives that allow
consumers and merchants to have easy access to efficient payments,
rapidly deploying instant payments, and harmonising electronic identity
and electronic signature services and their use in payments.
The
second fundamental element is the possible introduction of a digital
euro. A digital euro would be a digital equivalent of banknotes. It
would provide citizens with costless access to a simple, risk-free and
trusted digital form of central bank money. It would both shape and
promote the digitalisation of payments, in turn supporting the
modernisation of the European economy. The Eurosystem is assessing the
economic, financial and technological challenges a digital euro would
raise, as well as its societal and strategic implications. Earlier this
month, we published our Report on a digital euro and started a public
consultation.
We will assess the feedback we receive, so that if and when
developments around us make it necessary, we will be ready to issue a
digital euro that meets the needs of European citizens.
A digital
euro would complement cash, not replace it. While its role is
diminishing, cash remains the main way people make retail payments in
the euro area, and we will ensure that it remains widely available and
accepted as a reliable payment instrument and store of value.
These
policies are being complemented with appropriate regulation capable of
addressing the risks posed by new players while enabling innovation in
financial services.
The ECB is introducing an innovative payment
oversight framework. We have just launched a public consultation on a
new framework for electronic payment instruments, schemes and
arrangements (the PISA framework).
This new framework reviews some of our oversight tools and responds to
the various technological and market changes by redefining the scope of
our oversight activity and providing a future-proof, harmonised and
proportional framework inspired by the principle of “same business, same
risks, same rules”.
In parallel, the European Commission has published a proposal for a Regulation on Markets in Crypto-assets (MiCA),
which sets Europe on a steady path to tackle emerging challenges. The
legislative journey has just begun and will provide further
opportunities for fine-tuning the proposal. The ECB is analysing it with
a view to providing a formal legal opinion.
Implementing these
oversight and regulatory initiatives will guarantee that the prospective
use of stablecoins to provide payment services within the EU will
respect the same standards that currently exist for payment systems and
instruments.
A multi-sectoral response from central banks,
financial regulators, data protection authorities and competition
authorities is necessary. The European Commission, in its Retail
Payments Strategy for the EU, announced that it will examine the need
for legislation in this area.
Introducing
systemic products based on stablecoins before the necessary elements of
a comprehensive policy have been implemented, especially as regards the
oversight and regulatory response, could endanger rather than benefit
the European financial system. In September, five EU Member States
(Germany, Spain, France, Italy and the Netherlands) issued a joint
statement which maintained that no global stablecoin
project should begin operation until the relevant legal, regulatory and
oversight requirements have been addressed and met by the project. And
in October, the G7 Statement on Digital Payments recognised the regulatory and public policy issues arising from global stablecoins.
Conclusion
The
process of digitalisation cannot be reversed – on the contrary, it is
picking up speed. Global stablecoins are an expression of the need for
change.
However, they can pose serious risks, both to our monetary
sovereignty and financial stability and to the EU’s market structure,
competitiveness and technological independence. We should continue to be
open to global competition in order to foster innovation. But we should
first ensure that we are prepared to make the most of it, to the
benefit, not the detriment, of EU citizens.
The ECB’s response to
the ongoing transformation of the payment system is first and foremost a
policy response. Our focus is on stimulating the development of safe
and efficient EU payments that are fit for global competition.
ECB
The payments industry is undergoing a digital transformation, and this transformation is accelerating. We can now pay with cards that are stored in our mobile wallets, ready for a transaction to be initiated at the touch of a button. Mobile payment apps allow us to easily pay or send money to friends.The payments industry is undergoing a digital transformation, and this transformation is accelerating. We can now pay with cards that are stored in our mobile wallets, ready for a transaction to be initiated at the touch of a button. Mobile payment apps allow us to easily pay or send money to friends.
© ECB - European Central Bank