ECB president Lagarde speaks following the Governing Council's monetary policy meeting, in Frankfurt

European Central Bank (ECB) president Christine Lagarde speaks during a press conference following the Governing Council’s monetary policy meeting, in Frankfurt, Germany April 11, 2024. REUTERS/Kai Pfaffenbach

BERLIN, July 3 (Reuters Breakingviews) – The European Central Bank is losing a battle over the control of monetary policy to an unlikely foe – the European Commission. At the core of the row, ongoing for months, opens new tab, is whether the European Union needs to tighten its oversight of euro-dominated stablecoins – which are supposed to be backed by real assets such as cash or government bonds. Brussels reckons current regulation is sufficient, but it may be blinded by its preoccupation with the free movement of capital.

Commission boss Ursula von der Leyen is pushing a savings and investment union to offset anaemic EU growth. That context may explain why the EU’s executive body will soon consider euro-denominated stablecoins held by the foreign unit of an EU-based company as “fungible” with its own. Non-residents could thus in theory have a claim on the assets backing the European entity’s stablecoins. This might not be reciprocal, since the euro stablecoins issued in other jurisdictions would not be regulated by European authorities.

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The ECB’s fears about the resulting emergence of a big offshore euro crypto market are understandable: the eventual preponderance of stablecoin private money would weaken its control over monetary policy. That’s why it wanted to tighten rules enacted by the Commission in 2023 with its Markets in Crypto-Assets Regulation (MiCA, opens new tab). In a speech, opens new tab to the European Parliament last week, ECB President Christine Lagarde also noted that stablecoin issuers are not always able to maintain their value. Furthermore, the assets backing them can be opaque: the 2022 collapse of Terra, opens new tab showed that “stable” was not always an accurate description.
Brussels has dismissed these concerns: it says a run on a “well-governed and fully collateralised stablecoin” would be unlikely. Central bankers however remain cautious about stablecoins. A Bank for International Settlements report, opens new tab, while noting the technological advances allowed by their emergence, warned last week that they do not constitute sound money, and pose a risk to financial stability and monetary sovereignty.
Behind the ECB’s will to exert better control on euro stablecoins is its push to promote the future digital euro, opens new tab as a means of payment across the euro zone. But Frankfurt’s push to promote central bank money – with the digital euro replacing today’s cash – would be more efficient if it wasn’t from the start weakened by a decision to put a ceiling, opens new tab on the amount of digital currency that individuals might hold – around 3,000 or 4,000 euros – to avoid depleting bank deposits.

Brussels is taking a risk with its euro stablecoins decision. But the ECB can’t expect to be allowed tighter regulation on euro stablecoins while restricting the scope of its own digital euro.

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The European Commission is set to clarify that the European Union’s crypto rules allow stablecoins issued by a company with an EU licence to be treated as interchangeable with those issued by a company’s non-EU entities, a source close to the matter told Reuters on June 25.The Commission will provide the clarification in the near future, the person said, without giving further details.Stablecoins are “privately issued and notably pose risks for monetary policy and financial stability,” European Central Bank President Christine Lagarde told the European Parliament on June 25. These assets “are not always able to maintain their fixed value, compromising their usefulness as a means of payment and a store of value,” she added.

Editing by George Hay; Production by Oliver Taslic

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Pierre Briançon is a Breakingviews columnist, writing on European business and economics. He was previously a writer or editor at Barron’s, Politico, and Breakingviews for a first stint as Paris correspondent and European editor. For the first part of his career he was a foreign correspondent and editor at Libération, the French newspaper. He was also an economics columnist for Le Monde and for French public radio.