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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is group chief economist at BNP Paribas and a former senior official at the IMF
The European Central Bank has announced timelines to launch two digital euros: a retail one for the general public and a wholesale version accessible to the same institutions that have access to central bank money today. While the former has been drawing most attention, the one Europe urgently needs is the latter.
A successful rollout of the wholesale digital euro will have three major benefits. It will enable corporate and other institutional euro users to access the benefits of tokenisation and digital ledger technology finance via their banks without the risks inherent in stablecoins and other untested private innovations. It will also give the euro a fighting chance to play a key role in global tokenised finance and lay the foundations for integrated euro-based tokenised capital markets.
Tokenised finance, while still at an embryonic stage, has had explosive growth in some areas such as stablecoins in recent years, and is plausibly on its way to going mainstream. While its appeal initially relied in part on non-existent or light checks against illegal uses, there is growing awareness of the legitimate benefits.
These include instantaneity of transactions, the potential 24-hour-a-day availability of use, the ability to programme tokens to support smart contracts that carry out self-executing and automatic actions on pre-set triggers, transparency and traceability. As a result, corporates — especially those with international supply chains — are increasingly interested in digital ledger options to meet their standard finance needs. Meanwhile, technical and policy solutions are emerging to weed out illegal uses.
Until recently, an important impediment had been the lack of adequate “cash on chain”, or settlement currency, to facilitate transactions on the blockchain without incurring large risks (if using a volatile cryptoasset for payment) or transaction costs (if going in and out of the tokenised financial system for each settlement).
Stablecoins have recently burst on to the stage as an appealing solution to this problem, given that their value is, in principle, pegged to a hard currency — mostly the dollar. This has been strongly encouraged by US officials, who see stablecoins as a way of entrenching the dollar’s global status. This could rapidly become a problem for other jurisdictions, both for financial stability and monetary sovereignty reasons.
Encouraging the private sector to issue stablecoins on a large scale that are pegged to the domestic currency could mitigate sovereignty issues. However, that would do little to reduce financial stability risks and would also have implications for the transmission of monetary policy and the financing of the economy given that stablecoins, unlike bank deposits, do not facilitate monetary creation.
Making available a euro wholesale central bank digital currency (or wCBDC) is the best way to meet this challenge. This form of commercial bank money would allow corporates and other institutional users to benefit from all the advantages of tokenised finance without the drawbacks of mainstream use of stablecoins. This is now under way. Under a project called “Pontes”, the ECB is planning to introduce a wholesale digital euro that will enable settlement of transactions in central bank money using digital ledger technology by the third quarter of 2026. This would happen by linking the platforms using the technology to the ECB’s Target settlement system. Experimentation with Eurozone banks is ongoing.
This is part of a longer-term goal known as Project Appia that seeks to build a broader ecosystem for a wCBDC. This would be operated by the ECB’s Eurosystem or, ideally, provided by the central bank to regulated private groups to foster innovation. This infrastructure could also be linked to other wCBDCs worldwide.
While Europe is often portrayed as an innovation laggard, the Eurosystem is in fact at the leading edge of supporting digital ledger technology finance. Despite its technicality, this project deserves all the attention and resources it can get. A successful rollout of the euro-based wCBDC would allow tokenised finance in the euro to blossom without introducing new large-scale risks to financial stability. It would ensure the euro doesn’t fall irretrievably behind the dollar in global digital ledger finance. And it would provide solid grounds for an integrated European market for digital assets, leapfrogging the many obstacles that have so far prevented meaningful capital markets integration. The sooner that happens, the stronger Europe will be.