The EU’s central bank wants to seize the opportunity presented by blockchains and tokenisation. But its plan for embracing the technology might rile some of crypto’s most ardent proponents.
In order to realise the potential of tokenised markets, the EU will need a central bank digital currency, or CBDC, Piero Cipollone, a member of the European Central Bank’s Executive Board, said on Monday.
It’s the latest reminder that officials’ halting embrace of blockchain technology doesn’t necessarily come with an embrace of the beliefs that inspired it, such as scepticism of government-issued money and the desire for a “permissionless” financial system.
Crypto entrepreneurs have, by and large, inveighed against CBDCs, arguing they would become a tool of surveillance and control.
While some lawmakers in the US have attempted to ban the development of a digital US dollar, politicians and bureaucrats in the EU are moving ahead with a digital Euro they say will “guarantee the highest level of privacy.”
“The potential of tokenisation for Europe is significant — more efficient and more innovative financial markets, and the prospect of genuine cross-border integration that has long eluded Europe’s fragmented capital markets,” Cipollone said on Monday at a speech at House of the Euro, a co-working space in Brussels for central bankers.
“But two main obstacles are preventing scale.”
The first is an issue familiar to any crypto developer or user: the sheer number of blockchains, most of which are incompatible with one another.
“This fragments liquidity and increases integration costs,” Cipollone said.
The second obstacle is the lack of “tokenised central bank money,” he continued, “the safest and most liquid settlement asset.”
Addressing those issues will unleash tokenisation in the EU, according to Cipollone. But it will require three initiatives.
Digital Euro
The first is the development of a digital Euro.
Without it, people might be paid “in an asset they are not comfortable holding – one exposed to price volatility or credit risk,” Cipollone said. That, he added, “limits the market’s ability to scale.”
While businesses and consumers might transact in Euro-pegged stablecoins, those tokens would make a poor substitute for government-issued money, Cipollone said, citing research that shows fiat-backed stablecoins “rarely trade exactly at par.”
“Private settlement assets – whether tokenised deposits or stablecoins – will play a role,” he said. “But they require a trusted public anchor to function effectively across the whole tokenised financial market.”
Still, the central banker believes it is possible that one stablecoin becomes large enough that network effects cement it as the digital currency of choice. But he called it a “sub-optimal” outcome that would have “serious consequences for Europe’s monetary sovereignty.”
EU officials have worried in public and in private that the rapid growth of US dollar-pegged stablecoins could undermine the EU. That alarm has fueled development of a CBDC and what EU officials call “Eurosystem distributed ledger technology” — bureaucrat-speak for a European blockchain.
An EU initiative dubbed “Pontes” is developing a Eurosystem blockchain that will connect “market DLTs” with the bloc’s existing system for settling transactions, known as TARGET. The EU is aiming to release a pilot version of the Eurosystem blockchain in the third quarter of the year.
Companies and laws
The second initiative the EU will need to realise its tokenisation goals is a productive partnership with businesses that operate within the bloc.
“The services, liquidity and business models that will make tokenised markets valuable must come from the market itself,” Cipollone said. “In other words, the underlying infrastructure needs to be designed with the market’s needs at its core.”
The third initiative is the harmonisation of member states’ corporate law.
“Distributed ledger technology cannot harmonise corporate law across 27 Member States, reconcile divergent securities regulations or override national insolvency regimes that treat the same asset differently depending on where it is held,” Cipollone said.
