Lifting the CBDC veil: what the digital euro is really?about

It’s not about “consumer choice” at all?—?it’s much deeper than that.

Since the US inauguration, President Donald Trump has been causing consternation and on occasion panic in government offices around the world. This is true even in the staid halls of central banks, where officials are freaking out about economic impact, bond yields and more.

The areas under pressure include central bank digital currencies (CBDCs). Just a few days after taking office, Trump signed an Executive Order promising no US CBDC. You’d think that would give other central banks a breather in their plans, and perhaps even put some on hold – if the US doesn’t think it makes sense, perhaps the idea should be revisited?

Or, if you’re the European Central Bank (ECB), you could take Trump’s comments as a sign you have to accelerate your digital euro plans. And in so doing, you reveal the real motivation all along.

Care for the consumer?

For the past couple of years, European central bankers have been dressing up the digital euro initiative as a way to give consumers “what they want”, which is of course a pan-European digital payment platform. I wrote recently about ECB executive board member Piero Cipollone’s attempts to convince us that we are dissatisfied with our inability to use just one platform for all our domestic and cross-border payment needs.

Yet it seems few were convinced, with doubts emerging even within the CBDC team. In December, the European Parliament “rapporteur” – Stefan Berger, the representative responsible for steering the project through the legislative process since August 2023 – stepped down, citing opposition to the focus on a retail CBDC.

And in January, Bundesbank board member Burkhard Balz gave an interview in which he stressed the need for a CBDC in the face of growing concern about US and Chinese payment platform dominance in Europe. Chinese? Yes, it turns out that Alipay is increasingly used on the continent – at the recent European Football Championship held in Germany last summer, the Chinese payments platform was an official sponsor.

Balz’s comments started to reveal that it wasn’t about the consumer after all – it was about European dependence on foreign platforms. Or was it?

The day after the US President signed a crypto Executive Order promising to promote worldwide use of dollar-backed stablecoins, Cipollone said at a conference:

"I guess the key word here is ‘worldwide’ … This solution, you all know, further disintermediates banks as they lose fees, they lose clients ... That's why we need a digital euro." (quoted via Reuters)

Because a digital euro is all about protecting banks? Actually, no.

Cipollone gave more detail in an interview with Reuters last week, confirming that work on the digital euro project was now being accelerated because of Trump’s stablecoin remarks.

“My sense is that there is an increased sense of urgency because of the position that has been taken by the new US Administration. The fact that the US President went in so strong on this idea of promoting worldwide US dollar-denominated stablecoins obviously is a signal.”

Cipollone went on to give examples, such as PayPal’s stablecoin, of how dollar-backed stablecoins could become the more convenient option for European residents as well as tourists.

Now we’re getting closer to the real reason the ECB is going ahead with the digital euro: protecting demand for the EU currency. It’s not about consumer convenience as they originally insisted; it’s not about protecting banks; it’s about ensuring euro circulation. Politicians and central bankers not being totally honest about the motives is not a surprise – what is notable is the panicked abandonment of the pretence.

Read on, though, because there’s still one more layer to peel back.

Banking structure

The ECB panic is about more monetary policy – it could end up having deep political consequences.

In a scramble to “save” euro demand, a central bank is wading into competition with private businesses.

The ECB is not only competing with the commercial banks it is tasked with regulating, siphoning off deposits into the central bank-issued digital wallets. The cost to banks will depend on the balance limits – we don’t yet know what these will be, as the ECB has said it will be determined according to the economic situation at launch, which sounds unsettlingly vague. A study released last year showed that, if the oft-cited cap of €3,000 is applied, a 40% takeup would reduce bank profits by €8.8 billion a year. With 100% takeup, only 8% of the eurozone’s 714 institutions would meet legally required liquidity buffers.

The central bank is also competing with non-bank payment platforms such as Visa, Mastercard and Alipay, while doing little to remove the structural barriers to a European equivalent. This goes beyond oppressive regulation and constrained venture funds – it’s largely to do with the fragmented marketplace. The EU may have a common currency and customs union, but it does not have unified banking or payments regulation. And, given the power of entrenched interests, it’s unfortunately unlikely to be able to overcome that any time soon.

Stay with me, we’re getting closer to the bigger message.

What’s the problem?

Speaking at an event last week, Federal Reserve Governor Chris Waller spoke about CBDCs, insisting that he didn’t see what market problem they would solve. He made an exception, however, acknowledging that a retail CBDC could make sense “if you have a bad banking system”. As a European, I can confirm that the digital payments here are convenient, fast and relatively cheap (I haven’t seen a paper cheque in decades, unlike my US friends), so perhaps he wasn’t making a direct dig at the EU.

Or wait, maybe he was. When asked a direct question about the digital euro, Waller said:

“We do not use taxpayer dollars to go out and directly compete with the private sector. That’s purely a philosophical point. So the ECB is free to do whatever they want, but that argument would not fly in the US.”

Then again, some of Waller’s comments no doubt deepened the ECB’s concern:

“These things are going to broaden the reach of the dollar across the globe.”

He continued:

“It’s a lot harder to stop stablecoins than confiscating currencies.”

You can see how that would make European central bankers nervous.

Waller went on to pose a question that gets to the main issue – if the central bank is “back of the house”, dealing with flows between banks, and commercial banks are “front of the house”, dealing with the public, then:

“What I would like to know is, what is wrong with that model? What has changed that requires the central bank to now get out in front of the house?”

I think that reveals the systemically important message here, one that will have political ramifications.

There is an understandable fear of euro demand being pushed out by consumer preference for dollar-backed stablecoins. But that’s a market consideration, which should be solved by market solutions.

No, what the ECB is doing is much deeper. It’s publicly acknowledging a lack of confidence in the ability of European banks to do anything about the threat to euro consumer payments.

It’s not so much a “defanging” of European banks, as the public admission they never had fangs in the first place. And it’s a recognition that the internal divisions are so entrenched that banking union is a distant dream.

Public-facing banking services should be handled by commercial banks. The European Central Bank doesn’t think that commercial banks will be effective in competing with dollar-backed stablecoins. So, it’s moving into what has in recent history been a private business.

Contrast this with the US approach, which is to let markets solve market problems. And, look at it next to the recent flurry of European promises to “invigorate” innovation and competitiveness.

The likely lack of success in the latter will only continue to widen the demand gap between euro and dollar instruments, which suggests that the ECB could see fit to get even more involved in demand stimulation. And as we know, increasing public control of commercial marketplaces does not, generally, lead anywhere good.

This is an excerpt from my Crypto is Macro Now newsletter, a ~daily publication where I look at the impact of crypto on the macro landscape, and vice versa. If you’re not a subscriber and you’re interested in seeing beyond the crypto impact noise, I hope you’ll consider becoming one!

Oh, and of course, nothing I say is investment advice!