EU digital money strategy risks ceding tokenised finance to U.S. dollar networks

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EU digital money strategy risk

Highlights

Two major reports warn that the EU's digital money strategy risks ceding control of tokenised finance infrastructure and liquidity to U.S. dollar-dominated networks.
The Bruegel paper highlights that over one-third of stablecoin transactions in 2025 will be Europe-based, yet stablecoins remain overwhelmingly denominated in U.S. dollars, threatening infrastructure dollarisation in EU markets.
Recommendations include easing reserve rules, granting access to central bank liquidity, and accelerating ECB actions to prevent Eurozone reliance on foreign-denominated stablecoins and platforms.

Reports warn over Europe’s digital money framework

As reported by Financial Times, two recent papers argue that digital money is becoming a strategic battleground over who controls monetary infrastructure, liquidity and the distribution of financial power.

The latest annual Barcelona report from the Centre for Economic Policy Research and IESE Business School’s Future of Banking project says the key issue is not technical novelty but the institutional design of money. It argues that the decline of cash can reduce public seigniorage, weaken privacy, increase reliance on private digital infrastructure and deepen dependence on foreign-controlled platforms or foreign-currency instruments.

The report also revisits the long-standing two-tier monetary system in which central banks issue public money while commercial banks create most transactional money through deposits linked to lending. It supports keeping central banks at the core of the system and examines how a retail central bank digital currency, or CBDC, could address weaknesses in the current model, while also assessing the risks and opportunities of tokenisation.

At the same time, its treatment of tokenised bank deposits, digital coins issued by licensed banks that represent conventional deposits, points to a preference for extending the existing bank-based system into new technology rather than redesigning it more fundamentally. That approach may fit current regulation, but it risks underestimating the speed at which stablecoins are gaining traction and the power of network effects in digital finance.

Dollar-based stablecoins pose a strategic challenge

A separate Bruegel paper prepared for EU finance ministers says the risk is especially acute for Europe because stablecoin holdings globally are still overwhelmingly denominated in U.S. dollars, while more than one-third of stablecoin transactions in 2025 are Europe-based. That creates a realistic possibility that tokenised financial activity in the EU becomes tied to U.S.-linked and U.S. dollar-denominated networks.

The paper argues that current EU rules are highly protective of incumbent banks. Stablecoins must hold large reserves as bank deposits, remuneration is banned to avoid competing with deposit rates, and the planned digital euro is set to carry tight holding limits while also paying no interest. In practice, that framework appears designed to give banks the upper hand through tokenised deposits.

Bruegel warns that if EU-regulated products cannot meet demand, users can shift offshore to coins issued in other jurisdictions. Over time, that could produce what the authors call infrastructure dollarisation, where dollar stablecoins become the default settlement, collateral and margining assets in tokenised markets, even when the underlying securities are euro-denominated.

To counter that risk, the paper calls for a more enabling regime for EU-issued stablecoins, including broader reserve flexibility, access to central bank liquidity facilities and lighter holding limits and capital requirements. It also backs accelerating the European Central Bank’s work to make central bank reserves available as a wholesale settlement asset for tokenised finance, while the broader debate continues over whether the digital euro is being designed too narrowly and too slowly to serve as an effective strategic tool.

Our earlier article on EUR/USD weakness highlighted how renewed US dollar strength, driven by expectations of a more hawkish Federal Reserve, kept the pair under pressure. It also noted that the euro lacked support after the ECB meeting, as investors judged the ECB’s stance insufficiently hawkish and focused on the widening policy-rate gap that continued to favor the dollar.

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