MNI INTERVIEW: Euro Stablecoins Or Dollar Colony - Bini Smaghi

Europe needs to develop euro-denominated stablecoins or risk being colonised by the U.S. dollar, while the ECB’s planned digital euro could soon be obsolete, Societe Generale Chairman and former European Central Bank executive board member Lorenzo Bini Smaghi told MNI.

Having stablecoins available mainly in dollars “will inevitably boost the demand for dollar assets at the expense of all others, including the euro, unless stablecoin in euro also develop and are widely used,” Bini Smaghi said in an interview on Tuesday. “This is the key challenge for Europe, if it doesn’t want to be colonised.”

The digital euro under development by the ECB does not offer an alternative to stablecoins and its technology could soon be left behind by developments in cryptocurrency, he said, expressing surprise that this distinction is not fully understood by prominent economists and policymakers. (See MNI INTERVIEW: Digital Euro Risks Failure-Ex Bank Of Spain Gov)

“The best way for the Europeans to compete is to ensure that the euro stablecoins are safer than the dollar ones. This means that euro stablecoin issuers should be regulated and supervised by the ECB and therefore be able to access its refinancing facilities,” he said, noting that the U.S. Genius Act –which regulates tokens-- does not foresee that the Federal Reserve would act as the lender of last resort for dollar stablecoins.

“This will eventually be the case but not yet,” Bini Smaghi commented. (See MNI INTERVIEW: Stablecoin Boom Adds Uncertainty To Fed Policy)

“European regulation should thus ensure that non-euro stablecoins issued in Europe are backed by assets held in subsidiaries located in the Eurozone and supervised by European authorities. It may nevertheless require that MiCaR be revised,” he said, referring to the European Union’s Markets in Crypto-Assets Regulation.

Societe General’s Forge subsidiary is developing the use of euro stablecoins in partnership with Deutsche Borse.

“The purpose is to accelerate the integration of token-based cash solutions with traditional financial market infrastructure,” Bini Smaghi said.

Stablecoins could also help develope the EU's Capital Market Union, as they reduce frictions and enable instantaneous payments for financial transactions, according to Bini Smaghi.

“Retail investment would become much easier. Not only within Europe, but also cross border. European institutions, starting from the stock markets, will thus have to live up to the challenge,” he said.

NO MORE ECB CUTS YET

Turning to monetary policy, Bini Smaghi said he does not expect the ECB to make further cuts to interest rates in the near term, barring a negative shock to growth. Even if December’s ECB projections foresee inflation below 2% in successive years, it would still be too early to point to a risk of undershooting the price target, he added. 

“All projections have margins of error, " he noted, adding that his main concern is the pace of the reduction of the ECB’s balance sheet, which has continued steadily even as the Federal Reserve has stopped and the Bank of England has slowed down.

“In most European countries, like Germany, France and Italy, long-term rates are now higher than the nominal rate of growth – i.e. real growth plus inflation – which is not the case in the U.S. This means that financial conditions are tighter in Europe than in the U.S., although the U.S. economy remains stronger than ours,” he warned, adding that this approach is difficult to understand.