The New Money Stack: Europe's Digital Currency Choice
Why Europe needs both CBDCs and stablecoins to compete
With the rise of stablecoins, a new technological and ideological stack of money is being designed. The choices made today, whether opting for central bank digital currencies (CBDCs), stablecoins, or some combination, will determine the future of our economies.
Yet approaches across the globe diverge dramatically. The US explicitly rejects CBDCs while embracing private stablecoins—going so far as to allow even its own President and his family to launch their own stablecoin venture. Europe pursues both a digital euro project and comprehensive stablecoin regulation through MiCA. Meanwhile, China aggressively pushes its digital yuan while starting to selectively allow yuan-backed stablecoins for strategic purposes.
This divergence reflects a fundamental choice between public and private control as money goes digital and becomes programmable on blockchain infrastructure. Some regions are betting on private money innovation, others on state-controlled digital currencies, and still others are trying to balance both. These preferences often echo deeper institutional traditions: the French inclination toward state-directed systems that dominates continental Europe versus the British preference for private initiative that the US inherited, both shaped by how these nations organised maritime commerce from the 15th to 18th centuries.
This raises critical questions: What is the optimal balance between public and private money as payments and financial markets finally enter the digital realm? How should governments structure the new money stack to preserve sovereignty while enabling innovation?
Understanding the Digital Currency Landscape
Central bank digital currencies (CBDCs) are digital versions of a nation's official currency, issued and controlled directly by the central bank. They represent digital cash with the full backing and authority of the government.
CBDCs can operate as retail versions used directly by consumers and businesses for everyday transactions, or as wholesale versions used only for interbank settlements and large-value transfers. The wholesale version of CBDCs mirrors the existing two-tier banking system where central banks provide base money to commercial banks, which then create credit money through lending whilst maintaining reserve requirements that preserve central bank control over the money supply.
Stablecoins, on the other hand, are privately-issued cryptocurrencies designed to maintain stable value, typically pegged to a fiat currency like the US dollar. They're created by private companies or banks, not governments, and serve as a bridge between traditional finance and the digital asset ecosystem.
The key distinction lies in control and purpose: CBDCs extend government monetary authority into the digital realm, while stablecoins enable private sector innovation in digital payments.
Three Models, Three Futures
🇺🇸 The US has rejected CBDCs entirely while backing private stablecoins as the primary vehicle for digital dollar adoption. An early Trump executive order banned digital dollar development while explicitly promoting “legitimate dollar-backed stablecoins worldwide.”
This rejection stems from the American liberal tradition and weak central government structure that creates reluctance toward central bank oversight of personal finances. Trump exploited these privacy fears whilst simultaneously conceding CBDC abandonment to the crypto industry, his biggest financial backers in the 2024 electoral cycle.
The recent GENIUS Act, which passed the US Senate but still requires approval in the House of Representatives, provides regulatory clarity for stablecoin operations and leverages private sector innovation for global dollar adoption. It extends USD dominance through stablecoin networks while avoiding concerns associated with government digital currency. This approach is winning in market adoption terms: dollar-backed stablecoins command 97% of the $250 billion global market, with major issuers holding $166 billion in US Treasuries.
The American model benefits from a crucial structural advantage: US Treasury bills provide unified, liquid, virtually risk-free collateral for stablecoin reserves. This eliminates the need for a wholesale CBDC as infrastructure since Treasury bills already serve that function. USD stablecoin issuers can seamlessly back billions in digital tokens with government debt backed by the full faith and credit of the United States.
🇨🇳 At the opposite extreme, China pursues the most aggressive CBDC strategy while restricting foreign currency stablecoins that could facilitate capital flight. China uses the digital yuan (e-CNY) as its primary tool for yuan internationalisation, with 7 trillion yuan ($986 billion) in transactions across pilot programmes.
Restrictions target USD stablecoins used to circumvent capital controls, while Chinese companies like JD.com plan to leverage stablecoins as part of their strategies. Cross-border CBDC initiatives through the mBridge project connect Mainland China, Hong Kong, Thailand, the UAE, and Saudi Arabia in alternative payment networks.
🇪🇺 Between these two poles, Europe has developed the world's most comprehensive stablecoin regulatory framework through MiCA while pursuing an uncertain digital euro project. This dual approach reflects internal disagreements rather than coherent strategy, echoing historical tensions between French state-directed approaches and British private-sector traditions that shaped European institutional development.
Europe has implemented MiCA regulation requiring 1:1 reserve backing and strict compliance standards while pursuing a digital euro project that remains in preparation phase with unclear scope and timeline. As of March 2025, 10 firms have been authorised to issue 15 euro-denominated stablecoins, though none have achieved significant scale.
European consumers show little interest in digital euro adoption, while euro stablecoins represent less than 1% of the global market despite the euro constituting 20% of forex reserves. Major liquidity providers like Tether are exiting European markets entirely, and EU crypto investment is declining while other regions surge.
Europe's Strategic Missteps
Europe's current approach suffers from fundamental flaws that risk achieving none of its stated objectives. European policymakers treat CBDCs and stablecoins as competitors rather than complementary technologies. The discourse centres on choosing between CBDCs and stablecoins rather than deploying both strategically. This zero-sum thinking creates policy contradictions that undermine Europe's broader monetary objectives.
The ECB seems to be designing the digital euro primarily to protect banks rather than compete effectively. The bank is considering imposing holding limits around €3,000 per person, waterfall functionality forcing larger amounts into bank accounts, bank intermediation requirements rather than direct central bank access, and potential negative interest rates to discourage usage. These artificial limitations would make the digital euro less attractive than existing payment methods whilst undermining the monetary sovereignty objectives it supposedly serves. Some view the digital euro as “a side issue for banks, or even an outright failure.”
Meanwhile, MiCA's timing and requirements create systematic disadvantages for European stablecoin issuers, particularly those developing euro-denominated products. These challenges mirror broader patterns of reactive regulation that arrive after markets crystallise. Reserve composition rules requiring 60% in low-yield bank deposits versus 90% in higher-yield instruments for US competitors create permanent revenue disadvantages. On a €1 billion stablecoin, this yield difference means €30-40 million less annual revenue compared to American competitors like Circle.
The structural disadvantage extends beyond reserve requirements. Unlike the US, where Treasury bills provide unified collateral, Europe lacks straightforward backing assets for euro stablecoins. Each member state issues its own sovereign bonds with varying risk profiles and liquidity levels. German bunds, French OATs, and Italian BTPs carry different risks and trading characteristics, making euro stablecoin backing more complex and potentially fragmented compared to the unified Treasury market that USD stablecoins leverage.
Lengthy authorisation processes compound these structural problems. Large European banks face extensive documentation requirements and significant capital commitments despite regulatory expertise and massive balance sheets. Smaller fintech firms like Monerium, despite obtaining early electronic money licences, struggle to achieve meaningful scale. By the time European euro stablecoin issuers complete authorisation, non-European competitors have deepened their network effects. Restrictions on retail customer offerings further limit competitiveness compared to unrestricted global alternatives that offer multi-feature, seamless experiences.
The competitive reality reflects these systemic disadvantages. European exchanges are delisting major stablecoins, with Coinbase, Crypto.com, Binance, and Kraken all removing USDT. Only some EMT stablecoins have been issued in the EU and their circulation remains limited. Innovation capital flows to Asia and US jurisdictions with clearer frameworks whilst Europe constrains its own euro stablecoin providers through regulations designed to prevent yesterday's threats rather than enable tomorrow's opportunities.
The New Money Stack: A Strategic Framework
Europe can address its strategic missteps by implementing a layered approach that achieves all three objectives: preserving euro sovereignty, protecting banks, and enabling innovation. This framework treats CBDCs and stablecoins as complementary technologies rather than competitors, creating a digital monetary infrastructure that serves multiple constituencies simultaneously.
The foundation layer consists of a euro wholesale CBDC designed exclusively for interbank settlements and institutional use. This system would enable programmable money for complex financial transactions, provide 24/7 settlement using central bank money, and create the foundation for cross-border central bank cooperation. The wholesale CBDC functions like the internet itself: a public, standardised infrastructure layer that enables innovation without dictating specific applications.
This infrastructure becomes particularly crucial for Europe given its fragmented sovereign debt markets. While the US can rely on Treasury bills as unified collateral for stablecoin backing, Europe needs the wholesale CBDC to provide common monetary infrastructure that euro stablecoin issuers can leverage. Just as the internet provides the foundational protocol that internet service providers build upon, the wholesale CBDC would provide the monetary protocol that creates unified backing for euro-denominated digital currencies.
Crucially, this wholesale-only approach eliminates retail disintermediation concerns since consumers never directly access the CBDC infrastructure. Banks maintain all customer relationships and fee income whilst gaining enhanced efficiency and new revenue opportunities from digital currency services. The concept mirrors how central banks already function as core infrastructure for the financial system, providing settlement infrastructure like TARGET in the eurozone and acting as the clearing layer for interbank money flows.
The second layer enables a competitive euro stablecoin ecosystem built on this wholesale CBDC foundation. This framework would license multiple euro-denominated stablecoin issuers who function like internet service providers: they build customer-facing services on top of the underlying infrastructure whilst competing on features, pricing, and user experience. Just as ISPs provide internet access without needing to build their own global network infrastructure, stablecoin issuers could offer digital euro services without needing to navigate fragmented European sovereign debt markets.
This system would require full reserve backing with ECB oversight and mandate interoperability with the wholesale CBDC infrastructure. Unlike current restrictions, this approach would allow revenue model flexibility enabling interest earnings on reserves like US competitors, implement proportional regulation based on systemic importance, and provide clear authorisation pathways for European firms.
The parallel extends to established central banking functions: just as central banks already support licensed commercial banks that issue money-like claims on top of central bank money, this system would extend that model to regulated stablecoin issuers. These entities would function like narrow banks or payment institutions with direct access to CBDC-based settlement infrastructure, maintaining supervision and consumer protection whilst enabling innovation.
Critics might argue that providing stablecoin issuers direct access to central bank infrastructure creates moral hazard or undermines monetary policy transmission. However, the wholesale-only design with full reserve backing and strict oversight addresses these concerns whilst leveraging Europe's regulatory thoroughness through MiCA as a foundation for responsible innovation.
Finally, the top layer focuses on user-facing innovation driven by market competition. Private sector firms would compete on retail user experience, banks would offer euro-based digital currency services, and fintech innovation would operate under regulatory oversight with seamless integration between stablecoins and traditional banking. This creates global competitiveness through euro stablecoins competing internationally with USD alternatives, integration with international wholesale CBDC networks, and reduced dependence on US-controlled payment systems.
This layered approach resolves Europe's current strategic contradictions by treating public and private digital money as complementary rather than competing technologies. The wholesale CBDC provides the foundational infrastructure like the internet or AWS, whilst competitive stablecoins enable customer-facing innovation like ISPs or web applications. Rather than choosing between CBDCs and stablecoins, Europe would deploy both strategically to achieve objectives that current policy approaches cannot deliver simultaneously.
Why This Works
This layered approach delivers monetary sovereignty by reducing dependence on USD-denominated payment systems through euro-denominated digital currencies. European infrastructure provides payment system independence whilst the central bank retains ultimate monetary policy control. Sanctions-resistant networks operate under European jurisdiction rather than relying on US-controlled financial rails.
Banking system protection emerges naturally from the wholesale-only CBDC design. There is no direct central bank competition with commercial banks since consumers never access the CBDC directly. Banks maintain the customer interface and earn fee income whilst the wholesale-only structure eliminates deposit flight risks. New revenue streams emerge from digital currency services as banks become key intermediaries in the digital euro ecosystem.
Innovation flourishes through competitive euro stablecoin markets that drive adoption and user engagement. Private sector innovation operates within clear regulatory frameworks rather than facing restrictions that advantage foreign competitors. The European fintech ecosystem development accelerates as firms gain access to programmable monetary infrastructure, whilst global competitiveness in digital finance increases through euro-denominated alternatives to dollar-dominated systems.
The approach addresses Europe's unique structural challenges. Unlike the US, which benefits from unified Treasury markets as stablecoin collateral, Europe's fragmented sovereign debt markets require coordinated infrastructure. The wholesale CBDC provides this coordination whilst preserving member state fiscal sovereignty. The risk of a run on sovereign debt—a key vulnerability in the US Treasury-backed model—becomes managed through central bank oversight and the diversified nature of European monetary infrastructure.
Implementation Challenges and Next Steps
Moving from concept to reality requires addressing several implementation challenges. Technical interoperability standards must be established between the wholesale CBDC and private stablecoin systems. Regulatory coordination across member states needs streamlining to prevent fragmentation. Capital requirements for stablecoin issuers require calibration to ensure stability without creating prohibitive barriers.
The ECB would need to expand its operational capabilities to support both wholesale CBDC infrastructure and stablecoin oversight. This might require new technical expertise and governance frameworks that balance innovation enablement with prudential supervision.
Timeline considerations matter given rapidly moving global competition. A phased approach starting with wholesale CBDC infrastructure development, followed by stablecoin issuer licensing, could accelerate deployment whilst managing implementation risks.
The Choice Europe Faces
The digital currency landscape crystallises quickly. Early strategic choices determine long-term outcomes, and Europe's window for influence narrows rapidly.
Europe faces two paths:
Continue the current approach of restrictive digital euro design that few want to use, declining market share as innovation moves offshore, dependence on US-controlled digital payment rails, and reduced influence in global digital finance standards.
Alternatively, embrace the new money stack through complementary CBDC and stablecoin development, competitive euro digital currency ecosystem, preserved sovereignty with enabled innovation, and a leadership position in global digital finance.
The American approach demonstrates that private stablecoin success requires regulatory support, not opposition. Asian hubs show that balanced frameworks attract innovation capital. China proves that strategic CBDC deployment can challenge existing monetary hierarchies. Europe possesses the regulatory foundation through MiCA and the infrastructure potential through the digital euro project. What's missing is strategic coherence that treats these as complementary rather than competing initiatives.
The infrastructure being built now will determine how Europeans access financial services, how European businesses compete globally, and how the euro functions in a digital economy. The choice between defensive restriction and strategic competition will shape Europe's financial future for decades.
Continue restricting whilst competitors innovate, and Europe cedes digital finance leadership permanently. Embrace the new money stack, and Europe can preserve sovereignty whilst unleashing innovation that serves both banks and users. The window remains open, but it won't stay that way long.
Recommended in the euro stablecoin space:
In the Blind Spot: The great recalibration (£) (Izabella Kaminska, The Blind Spot, 28 June 2025)
The quest for cheaper and faster cross-border payments: regional and global solutions (Piero Cipollone, European Central Bank, 27 June 2025)
European Commission to allow stablecoin interchangeability (Valentina Za and Elizabeth Howcroft, Reuters, 25 June 2025)
Fungibility: MEPs challenge backdoor entrance of foreign stablecoins under EU’s MiCA (Ledger Insights, 25 June 2025)
Recommended more broadly in stablecoins:
South Korea lifts 14-year ban on ‘kimchi bonds’ after dollar-backed stablecoins frenzy (Song Jung-a and William Sandlund, The Financial Times, 30 June 2025)
Seoul Searching (£) (Marc Rubinstein, Net Interest, 27 June 2025)
Circle’s Complicated FX Trade ($) (Byrne Hobart, The Diff, 26 June 2025)
Crypto Coin For Russian Shadow Payments Moves $9bn - A Sanctions Evading Stablecoin Storm (John Brock, Blockchain Magazine, 26 June 2025)
Stablecoins: Entering their untethered growth era (Advika Jalan, Oliver Richards, and Tom Scowsill, MMC, 25 June 2025)
Federal Reserve Releases Plan to Relax Key Bank Capital Rule ($) (Katanga Johnson and Hannah Levitt, Bloomberg, 25 June 2025)
The Dangers of Stablecoins (£) (Chris Giles, The Financial Times, 25 June 2025)
Financial Repression Isn't What It Used To Be (€) (Nicolas Colin, Drift Signal, 25 June 2025)
Crypto coin for Russian shadow payments moves $9bn (£) (Polina Ivanova, Oliver Hawkins and Eade Hemingway, The Financial Times, 25 June 2025)
The next-generation monetary and financial system (Bank of International Settlements, 24 June 2025)
China faces FOMO as dollar-pegged stablecoins expand rapidly (Denis Omelchenko, Crypto.news, 24 June 2025)
China Is More Than Ready for US Stablecoins ($) (Andy Mukherjee, Bloomberg, 23 June 2025)
Mastercard enables stablecoins USDG, PYUSD, USDC, FIUSD on its network (Jorn Lambert, MasterCard, 23 June 2025)
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