Global Macro Research
Monetary PolicyIs the digital euro a solution in search of a problem?
The ECB is developing a central bank digital currency in response to changing digital payment demands, in contrast to the US strategy of pursuing privately issued stablecoins. The ECB hopes this will protect its monetary sovereignty while avoiding some of the risks associated with stablecoins. But it could crowd out private sector innovation while being insufficient to meet the ECB’s goals.
Author
Felix Feather
Economist
Duration: 1 Min
Date: Dec 17, 2025
Key Takeaways
- In the Eurozone the usage of physical cash is steadily decreasing. Although digital money that is a liability of commercial banks is of course widely available, a digital liability of the central bank is not available to households and non-bank corporates.
- The ECB’s proposed digital euro, a central bank digital currency (CBDC), is meant to fill this gap by providing a fully digital, central bank-issued medium of exchange. The ECB is targeting 2029 for full rollout.
- This approach is very different to that of the US, which is promoting privately issued stablecoins, and banned the Federal Reserve from issuing a CBDC.
- The potential global dominance of dollar stablecoins could pose a risk to the ECB’s monetary sovereignty. But various institutional constraints and risks to the banking system could prevent the ECB from promoting stablecoins. So, it is pursuing a CBDC instead.
- But the digital euro could itself pose a financial stability risk. Depositors could withdraw funds from the banking system, preferring to store value in the form of digital euros. To avoid this, the digital euro will be non-interest-bearing and subject to holding limits.
- However, this leaves the ECB in the strange position of promoting widespread usage of the digital euro while simultaneously restricting holdings. This may limit its adoption, restricting the central bank’s ability to stay at the frontier of changes to the payment system and global monetary order.
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