Europe’s approach to meet the challenges and leverage the opportunities of the tokenisation of finance

Abstract

The paper explores the implications of financial tokenisation and the rise of stablecoins for Europe’s monetary sovereignty and financial stability. Distributed ledger technologies are driving a structural transformation in financial markets by enabling tokenised transactions that promise efficiency gains, enhanced automation and cost reductions. However, the rapid growth of stablecoins — predominantly US dollar– denominated and issued by nonbank entities — poses risks for monetary sovereignty and financial stability, as well as rising interconnections with public debt markets, which could affect monetary policy in the future. These include potential fragmentation of liquidity, increased counterparty risk, disruptions in monetary policy transmission and disintermediation of banks. Moreover, the expansion of stablecoins could challenge the two-tier monetary system that underpins trust in money and economic growth. Against this backdrop, the European Union (EU) and its system of Central Banks — the Eurosystem — face a dual imperative: to safeguard the quality of money and capacity to finance the European economy thanks to the two-tier monetary system, and to preserve European sovereignty in a multipolar world. The introduction of a wholesale central bank digital currency, a clear and robust regulatory framework and initiatives to develop tokenised commercial bank money are central to this strategy. The paper examines these issues through three lenses: Eurosystem actions, the current regulatory environment and European private-sector initiatives. This paper is also included in The Business & Management Collection, which can be accessed at https://hstalks.com/business/.