European Banks Warn of Falling Behind Dollar Stablecoins, Urge Push for Euro Digital Payments

European banks are warning that the region could fall behind in the race to develop stablecoins and tokenized deposits. With dollar-based stablecoins leading global digital finance, Europe needs to build up its own payments infrastructure and strengthen the competitiveness of euro-denominated tokenized money.

FinanceFeeds reported on June 15 that the Euro Banking Association, or EBA, recently published a report on the adoption of tokenized money.

The report analyzed stablecoins issued by banks and electronic money institutions, tokenized deposits, deposit tokens, practical use cases and the conditions required for wider adoption. It excluded central bank digital currencies, or CBDCs, and cryptocurrencies such as Bitcoin.

The EBA said stablecoins and tokenized deposits remain at an early stage, but are becoming increasingly important in the competition to shape global financial infrastructure. It pointed to a rapid increase in stablecoin experiments by Visa and Mastercard, tokenized products from BlackRock, blockchain pilots by major banks and cross-border payments trials.

Europe sees the spread of dollar-based stablecoins as a major risk. If dollar-pegged stablecoins come to dominate the global market, reliance on the dollar in digital finance could deepen. That, in turn, could weaken Europe's payments sovereignty and the competitiveness of its financial infrastructure.

The report said Europe risks becoming dependent on foreign infrastructure and losing influence in digital finance if it fails to sufficiently develop euro-based tokenized payment instruments. That is making debates over regulated stablecoins, tokenized deposits, a digital euro and bank-led blockchain infrastructure more important.

The EBA said widespread adoption of stablecoins will not happen automatically. Changing payment habits among consumers and businesses will take time. For tokenized payment instruments to become mainstream, they must satisfy requirements for regulatory compliance, security, resilience, cost efficiency and user experience.

The report identified cost efficiency and user experience as stablecoins' main strengths. Even so, it said a clear edge over existing payment networks has yet to be proven. "The key differentiators compared with existing payment networks still need to be demonstrated," the EBA said.

Banks are also growing more wary. Stablecoin issuers, big technology companies, payment networks and digital wallet providers could eventually seize control of future payments infrastructure. As a result, banks are paying closer attention to tokenized deposits and deposit tokens that can function within regulated financial infrastructure, rather than parallel payment networks outside the traditional financial system.

Wim Grosemans, chair of the EBA's Digital Money and Smart Payments Working Group, said the underlying technology is evolving quickly and adoption of tokenized money is spreading to global payment networks and large corporations. Financial institutions should proactively assess the sector and make investment decisions, he said.

"It is important to remain competitive and capture new opportunities," he added.

Market participants expect stablecoins and tokenized money to continue moving into mainstream finance. But the next stage of competition may hinge less on whether to adopt stablecoins than on whether Europe can secure its own infrastructure and customer touchpoints against a dollar-centered digital payments network.