Stablecoins - new assets, old risks?

I talked at a Bundesbank conference today about stablecoins. Given that my presentation was framed as “view from academia”, I started talking first about financial innovation more generally, a topic I have worked on quite a lot.

Financial innovations have driven the development of the financial sector over the past centuries. The 13th century saw the development of double book-keeping in Italy. The late 19th century saw the rise of universal banks in Germany to fund industrialisation and bond markets in the US to fund railway expansion. The 1950s saw the introduction of the credit card and the 1960s of the ATM.

Three technological innovations have triggered a new wave of financialinnovation in the 21st century.. First, mobile technology, the Internet and Internet application programming interfaces, APIs which have enabled much quicker information exchange, new delivery channels for financial innovation and a better exploitation of economies of scale, scope and networks. Second, the IT revolution has facilitated the creation, processing and the use of big data for financial risk measurement and management. And finally, distributed ledger technology (DLT), which started with blockchain and with cryptocurrencies, but has of course gone far beyond, also by allowing for smart contracts.

All of these new technologies have led to financial innovations with big benefits. Mobile technology has increased financial inclusion, especially in developing countries, by allowing more people at a cheaper rate to access financial services than having to go to branches that are not as common in less populated, less densely populated countries. Big data and new sources of data have allowed non traditional clients to be included, by allowing new types of data, such as social media data or the digital footprint to assess applicants' credit worthiness. And distributed ledger technologies can reduce processing time, allow almost instant trading and settlement.

However, financial innovation also poses risks. Specifically, financial innovation can contribute to systemic risk by allowing banks to take more risks. Better risk diversification, if everybody diversifies the same way, might result actually in higher rather than lower systemic risk. Financial innovation can be used for regulatory arbitrage, and we've seen this in the run up to the global financial crisis with special purpose vehicles. But it can also lead to additional risks of operational failure or vulnerabilities to cyber attacks.n. More generally, digitalization AI might put too much emphasis and too much trust on technology rather than human judgment.

If we analyse stablecoins with this framework for financial innovation, we can see that they are use cases for stablecoins, such as cross-border payments, even though almost 90% of transactions with stablecoins are for on- and off-ramping into the crypto world or to use them as collateral for crypto lending. So, for the moment, all they are used for is as bridge between the crypto world and traditional finance. And in Europe, there seems even less of a use case, given the relatively high efficiency of our cross-border payment system. But ultimately, it is the consumer and the market who decide. And competition to the traditional banking and payment system is to be welcomed!

It is for the regulator and supervisor to minimise the risks, of which there are quite some. First, stablecoins are not stable, i.e., they can break the peg or (to make the equivalent to money market funds) the buck, which poses a problem for stablecoin holders. This leads to a second problem: possible runs on stablecoins, which might force them to liquidate their assets, in the form of bank deposits and government bonds. Or alternatively, the failure of a bank where a stablecoin holds large share of its asset might result in the breaking of the peg (as happened in March 2023 with the failure of SVB and USD Circle breaking the peg). This leads to a third problem, the knock-on effects of a stablecoin run and depegging on the rest of the financial system: it can result in bank liquidity problems and even disruptions on the government bond markets. Given the current stablecoin capitalisation, this does not seem a problem yet, but given growth projections, it might turn into a problem eventually.

Regulators and supervisors have learned to balance benefits and risks of financial innovations, such as stablecoins. However, there is now an additional dimension, that of geopolitics. Given the actions of the Trump administration undermining the status of the US dollar as global reserve currency while at the same time increasing the US fiscal deficit and thus the supply of US Treasuries, the US administration has decided that pushing USD denominated stablecoins is a good instruments to attract more demand for US government bonds. This push for USD denominated stablecoins risks undermining monetary sovereignty of other jurisdictions and global financial stability. While before one could count on the US - for simply selfish reasons - to coordinate globally during financial distress situations originating in the US, once can no longer count on that. Taking a clearer stance against what can only be described as ‘weaponisation of finance’ is therefore strongly in the European interest.

In my discussion I also referred to the recommendation of the ESRB to either prohibit or more stringently regulate and supervise third country multi-issuer stablecoins, but I have covered this in a previous blog entry, so will not repeat it here.

7 May 2026

Unicredit and Commerzbank

The Shareholder meeting of Unicredit approved today an increase in capital to fund a take-over offer to the shareholders’ of Commerzbank. I was interviewed on this and the more general question of cross-border mergers in Europe by WDR 5(in German). While I cannot talk about the commercial details of this specific deal, I can talk about the need for more pan-European banks. Europe has large banks, but they are all national and dwarf in comparison to US banks. Now, big is not always better, but in times of need to invest in digitalisation and AI, scale economies are important. Larger scale can also be important for big banks to support the development of capital markets within Europe (which will ultimately help also innovative start-ups through the development of a venture capital ecosystems that depends on deep and liquid capital markets).

So, there is a natural trend towards consolidation in banking; the problem arises if such consolidation takes place exclusively on the national level, which would raise too-big-to-fail concerns and concerns of the bank-sovereign doom loop we saw during the Eurodebt crisis. So, having large European rather than national banks can be helpful, as it would ultimately help create a truly European Single Market in finance, something we do not have at this stage.

But are we not missing the European financial safety net to prevent turmoil like in 2008, with a European deposit insurance missing and the resolution framework missing a backstop? Yes, that is indeed the case and ideally a complete European financial safety net would be created before pan-European bank mergers take place. However, the political reality is a different one and one can only hope that more of such cross-border mergers will provide the necessary momentum to complete the banking union.

Will SME finance in Germany suffer if Unicredit takes over Commerzbank? First, Unicredit is as much an SME lender as is Commerzbank and not only in Italy but also Central and Eastern Europe where it has subsidiaries. Second, there is no indication that Unicredit would shut down this part of Commerzbank’s business especially if profitable. Third, Germany is not suffering from a lack of financial institutions that focus specifically on this enterprise segment.

So, why is it that German politicians are against this merger? It cannot be about jobs, as the previous government tried to induce a merger between Deutsche Bank and Commerzbank, which would have cut many more jobs than the takeover of Commerzbank by Unicredit. Is it rather banking nationalism, i.e., the closeness of politics in a country to the banks in the same country? Something well documented in Germany (e.g., in this paper, by Rainer Haselmann and co-authors) and many other countries.

To come back to my initial sentences - I cannot judge the commercial details of Unicredit’s take over bid, but I can clearly see the need for more pan-European banks! And cross-border mergers are the only sensible way to get there.

4. May 2026

The Global role of the euro

I was invited to a public hearing of the European’s Parliament ECON Committeeto discuss the ‘global role of the euro’. Below I paste in my introductory remarks.

An important topic that came up during the Q&A session was the why we would want to strengthen the global role of the euro. There are benefits and costs of providing the global reserve currency (referring to the Triffin dilemma and Kindleberger’s hypothesis that a stable, open global economy requires a single dominant hegemon to act as a stabilising force which comes with obligations for the country providing this currency); more importantly, I would consider it naive to push to aim that the euro replace the US dollar as global reserve currency, even if all the conditions I mention below are being met.

I would rather see the strengthening of the global role of the euro as a way to strengthen the strategic autonomy and thus resilience of Europe. We need less dependence on the US, aim for global cooperation where and when possible but also be able to stand alone if necessary. Further, a true Savings and Investments Union in Europe will also strengthen the global role of the euro; so, to an extent, stronger European capital markets and a stronger global role for the euro are two sides of the same coin.

Introduction

Since its inception in 1999, the Euro was widely expected to emerge as a premier global reserve currency capable of rivalling the US Dollar (USD). Decades later, that transition has not materialised. While there was an increase in the international role of the Euro in the early years of this century, it declined significantly after the Global Financial Crisis. Currently, composite indices show a role of less than 20%. And while there has been a decline in the role of the USD as reserve currency (from 71% in 1999 to 59% in 2021), this shift out of dollars has been to a quarter into the Chinese renminbi, and three quarters into the currencies of smaller countries (Arslanalp et al., 2022), so the Euro has not really benefitted from this decline.

While there are short-term fluctuations in the international role of the euro related to business and monetary policy cycles, I would like to focus on long-term trends but link this discussion to recent events and discussions. Importantly, the debate over the Euro’s international standing has been reignited by the dramatic geopolitical and geoeconomic shifts of the past year.

To understand the Euro’s potential, we must first define what a "global role" entails. It is multifaceted, encompassing a currency's use as a reserve currency for central banks, a funding currency for international debt and equity, and an invoicing currency for global trade.

Why the US Dollar Remains Dominant

To understand why the Euro has struggled to gain ground, we must look at the pillars of USD dominance as global reserve currency:

1. Market Depth and Liquidity: US financial markets possess unparalleled depth and liquidity. US Treasuries are universally regarded as the global safe asset, supported by a dynamic and innovative economy.
2. Institutional Strength and Legitimacy: The US has historically offered a robust institutional framework characterised by strong property rights and rule of law, reliable contract enforcement, and government efficiency and transparency. Political and constitutional checks and balances have fostered global confidence in US monetary, fiscal, and trade policies.
3. Geopolitical Alignment: Historical data suggest that military alliances play a crucial role in countries’ choice of reserve assets. Countries allied with the US through military alliances tend to hold a higher share of their reserves in USD, even when accounting for trade links (Eichengreen et al., 2019). The role of the US as global hegemon over the past 80 years (and even more so after the end of the Cold War) has strengthened the role of the USD as global reserve currency, including in transactions related to critically important commodities (e.g., petrodollar indicating the use of USD as unit of account for oil in global markets).
4. Network Effects: The USD benefits from an "incumbency advantage." Its role is baked into the international system, including through a self-reinforcing positive feedback loop among its three primary functions (the wider use in one dimension increases its attractiveness in the other two); change occurs slowly due to network effects, though history suggests shifts can happen "gradually, then suddenly" (and we might get to a point like this in the near future). Furthermore, the Federal Reserve acts as the indispensable international lender of last resort.

The European Shortfall

Comparing the Euro area, and the EU more generally, to the US reveals why the Euro’s global role remains limited. European capital markets are significantly shallower and lack a unified "safe asset" comparable to US Treasuries. Currently, only German Bunds are viewed as truly safe and sufficiently liquid, and their supply is limited (German government bonds amount to 2 trillion euro compared to 30 trillion USD of US Treasuries).

Institutionally, Europe faces internal fragmentation. There is a notable divergence in the legal frameworks and government efficiency across the 27 member states, with the average in indices of institutional quality well below the US. Furthermore, the common law systems of the US and UK are often perceived as more flexible and reliable for international finance than the varying civil law frameworks within the EU.

Finally, while the EU is an economic powerhouse, it has yet to project equivalent geopolitical weight given the absence of a common foreign policy. Until recently, the EU has explicitly avoided any military role (leaving this to NATO, where 23 EU member states are also members) and has a limited role as geopolitical player.

In sum, compared to the US, the EU falls short on capital market depth and liquidity, a European safe asset, institutional strength, and a geopolitical role. These are some important factors that can explain why the Euro does not have the same global role as the USD.

A Shifting Horizon: The Erosion of Dollar Trust

While the recent history favours the USD, the future is less certain. Several current US policy trends may be undermining the dollar’s hegemony:

1. Institutional Erosion: Domestic political volatility, political interference into judicial processes, and a perceived slide toward authoritarianism reduce international trust in the US and thus the USD.
2. As military alliances are questioned, the incentive for allies to hold USD reserves may diminish. At the same time, the decoupling in international trade and investment flows between rival geopolitical blocks and attempts at building alternative global payment systems to the USD dominated system might further undermine the role of the USD as global currency. Further, there is an increasing fear that the US may "weaponise" capital flows just as it has trade, including towards countries that until recently were considered allies.
3. Fiscal Instability: Rising deficits and debt levels raise questions about the long-term safety of US Treasuries, even though so far there has been no clear adverse reaction by investors.
4. Regulatory Independence: Threats to the independence of the Federal Reserve and other regulatory and supervisory authorities undermine the foundations of the US financial system and raise questions about international cooperation between central banks and regulatory and supervisory authorities, so urgently needed during systemic distress situations.

The Path to European Strategic Autonomy

Recent global events have exposed Europe’s heavy dependence on the US financial system—from payment rails (Visa, Mastercard) and Central Counterparties (CCPs) to the reliance of European banks on USD funding. Reducing this dependency is not just an economic goal; it is a prerequisite for strategic autonomy.

Strengthening the global role of the Euro is inextricably linked to the project of a Savings and Investments Union. By deepening our internal markets, we simultaneously build the infrastructure needed for a global currency. I would be happy to elaborate on this further during the questions.

Strategic Recommendations: How to Promote the Euro

To elevate the Euro's international standing, Europe must act decisively, looking at benefits in the long-term and avoiding short-termism, in several areas:

1. Create a Unified Safe Asset, with sufficient volume, variety in tenors and frequent issuances: This is a necessary, though not sufficient, condition for a global currency. I can talk more about this at a later stage if requested so.
2. Deepen Capital Markets: Following the recommendations of the Draghi and Letta Reports, the EU as a whole and EU member states must foster an environment conducive to innovative and transformative large-scale investment. This includes more investor-friendly legal framework and financing models for innovative projects and start-ups.
3. Maintain High Standards: We must preserve the independence of central banks and regulatory and supervisory authorities while holding a consistent line on regulatory and supervisory standards for crypto-assets, including stablecoins.
4. Innovate in Payments: The development of a Digital Euro on the retail level, Appia on the wholesale level and Pontes as distributed ledger technology (DLT) settlement platform are important first steps, alongside support for private European payment initiatives, to reduce reliance on US-based rails, such as Wero, a pan-European mobile payment system built on SEPA Instant Credit Transfer, and initiatives to establish interoperability between domestic payment systems.
5. Expand Liquidity Networks: The ECB should work with other non-US central banks to establish and expand liquidity swap lines to thus reduce reliance on the US.
6. International Cooperation: Europe must remain a champion of multilateralism, continuing to work with other international partners—including the UK—even in instances where the US is not a partner. This also includes initiatives to interlink Euro area payment systems with other fast payment systems globally.
7. Finally (and somewhat beyond the brief of this committee and my own area of academic expertise), the EU must project a stronger geopolitical role, in cooperation with other friendly countries but independent and focused primarily on its own interest (and obviously those of its citizens).

All these actions require looking beyond short-term national interests and focusing on Europe’s long-term interest to maintain and grow its prosperous and democratic societies.

Conclusion

As the hegemony of the USD as global reserve currency is being questioned, it is unlikely that there will be a smooth transition to a new equilibrium. The Euro area and the EU therefore stand at a crossroads, with challenges and opportunities. By addressing internal fragmentations and building a robust, independent financial infrastructure, the Euro can finally begin to fulfil the global role envisioned at its birth. Strengthening the Euro is not merely about competition; it is about ensuring Europe's resilience in an increasingly volatile world.

References

Arslanalp, Serkan, Barry Eichengreen, and Chima Simpson-Bell (2022): The Stealth Erosion of Dollar Dominance: Active Diversifiers and the Rise of Nontraditional Reserve Currencies, IMF Working Paper 22/58.

Eichengreen, Barry, Arnaud Mehl and Livia Chitu (2019): Mars or Mercury? The geopolitics of international currency choice, Economic Policy 34, 315-63.

European Central Bank (2025): The International Role of the Euro. Frankfurt a.M., Germany

Gopinath, Gita, Pierre-Olivier Gourinchas, Andrea F. Presbitero, and Petia Topalova (2024): Changing Global Linkages: A New Cold War? IMF Working Paper 24/76.

16. April 2026

Trump’s war, everybody’s problem

One month has passed since President Trump decided to attack Iran, joint with (and maybe pushed by) Israeli Prime Minister Netanyahu. The goals of regime change or unconditional surrender have not been achieved. In the meantime, the Iranian regime has taken the global economy hostage by partly blocking the Strait of Hormuz. So far, one can argue, the costs of the war are significantly higher than the benefits. It is also not clear there is an exit strategy and that the cost-benefit balance will favour the US any time soon.

The situation is hard to capture in slogans and protest signs. The theocratic Iranian regime is a terror regime, not just within its own country but throughout the region with its allies Hizbollah, Hamas and the Houthis. Containing the threat posed by this regime is a legitimate geopolitical goal as is to foster democratic resistance in Iran. The question is how to go about it. In 2015, the Obama administration together with several European countries came to an agreement with the Iranian regime on limits on nuclear enrichment and third-party inspections of nuclear facilities. While far from perfect, it was seen by many as an important first step towards the threat by Iran. Trump exited from the agreement during his first presidential term, resulting in new tensions between Iran and the US. Forcing Iran through sanctions to abandon any nuclear ambitions has not resulted in a success either, ultimately leading to the stand-off before the current conflict. There are strong indications (including directly from Marco Rubio) that Israel might have forced the hand of the US by deciding to unilaterally attack Iran. And now we are in a situation of the US throwing around its military might without achieving its goal. So as laudable the goals of regime change and containing a terror regime are, the current US strategy to achieve these goals has clearly failed so far.

There are a lot of suggestions that the European partners in the NATO are somewhat obliged to help the US in this war; these suggestions are simply wrong. First, NATO is a defence pact, but the US has not been directly attacked by Iran. And the US has not even asked to trigger Article 5 (joint defence if one member state is attacked), which shows that this argument simply does not hold. It is important to note that in the one case that the US did trigger Article 5 (after 9/11), the European NATO partners did respond and helped defeat the Taliban and Al Qaeda in Afghanistan (and no, they did not stay behind the lines, like president Trump did during the Vietnam War). Second, comparing the Iran war to the Ukraine conflict is similarly wrong. One, Ukraine is not the aggressor, but Russia is, violating the Budapest Memorandum; two, European countries provide by now more military aid than the US. While security assurances provided in 1994 by Russia, US and UK cannot be interpreted as defence guarantee, they certainly cannot be interpreted either as simply ‘looking away’, as Mr. Trump sometimes suggests.

Even though the European countries are not morally or legally obliged to help the US, ultimately, they will have no other choice than to step in if the situation deteriorates further. With oil prices rising and the threat of supply chain disruptions, other countries might have to intervene to secure shipping routes. The important point is that this cannot happen ‘on command’ but rather in coordination and cooperation, words that are rather foreign to Mr. Trump’s world view.

Beyond the current crisis but reinforced by it, one important lesson learned over the past 15 months of the second Trump administration is that one can no longer trust the US. The flip-flopping in terms of policy actions, public humiliations, and open blackmailing will ultimately lead to a clear distancing of countries from the US; the cautious reaction of European countries to the call for assistance by the US in the Strait of Hormuz is a clear indication of that. Ultimately, this will damage the US, with the winner being China.

Another important lesson learned is that dismissing experts will come back to bite you eventually - a lesson learned the hard way by the UK during the Brexit process. The staff of the National Security Council in the US is an impressive collection of foreign policy and defence experts, but has been reduced both in numbers and influence and the impulsive decision to go to war with Iran without any scenario planning shows that. Many experts would have warned the president Trump that Iran might block the Strait of Hormuz, but he was not interested in their views and thought he knew better. The world is worse off because of that.

31. March 2026

Previous entries