The quest for digital sovereignty in Europe

CRYPTO assets can influence financial stability and monetary-policy transmission. Currently, systemic risks are limited, as crypto markets remain relatively small and are not deeply intertwined with the conventional financial system. The market capitalisation of the crypto sector accounts for less than 1 per cent relative to global net financial assets.

However, stablecoins in particular could gain further relevance against the backdrop of a growing global market and increasing legal clarity. The reserve assets of stablecoins – such as bank deposits or government bonds – already create a link between the crypto system and the traditional financial system.

The use of stablecoins for applications outside the crypto system is still limited but could grow. At present, stablecoins are primarily used within the crypto system for trading crypto assets such as Bitcoin and in decentralised finance applications.

Nevertheless, according to data from Visa, adjusted transaction volumes for 2025 were estimated to reach nearly US$10 trillion by the end of November – a historic high and an increase of 70 per cent compared with that in 2024. During the same period, the global market capitalisation of stablecoins has risen to more than US$300 billion, representing growth of nearly 50 per cent since the beginning of the year.

The continued rapid growth in global crypto markets and increasing ties with the traditional financial system could put financial stability at greater risk – especially if this coincides with continued global fragmentation in the regulation of crypto assets. To eliminate risks from cross-border regulatory arbitrage, the timely implementation of internationally agreed global standards for the regulation of crypto assets is key.

Considerations for maintaining stability

The widespread use of crypto assets rather than the domestic currency as a means of transaction could undermine central banks’ ability to effectively conduct monetary policy and maintain price stability.

Daisuke Ikeda, senior economist at the Bank of Japan, shows that the impact of a domestic monetary-policy shock diminishes as the unit of account is increasingly substituted by foreign currency.

This means that the impact of a change in interest rates declines as prices and wages are increasingly set in units of a foreign currency. Conversely, the impact of foreign monetary policy on the domestic economy increases accordingly.

Academics Pierpaolo Benigno, Linda Schilling and Harald Uhlig explore the effects of using crypto assets as a global medium of exchange. They have demonstrated that monetary-policy independence declines.

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In other words, they have found that the scope for setting interest rates that are distinct from foreign countries narrows if foreign forms of money or crypto assets are widely used as a means of payment.

The increased use of crypto assets and stablecoins is an example of how financial market structures, instruments and architecture are evolving.

Even though the crypto market is still relatively small at present, it is growing rapidly. As a central bank, we are particularly focused on examining the implications for financial stability and monetary policy.

So far, there is no evidence that monetary policy has become less effective. However, the relative importance of different transmission channels could shift, particularly from the banking channel to asset prices.

Possible questions are: What are the drivers of growth for non-bank financial institutions – regulatory arbitrage, increasing savings in an ageing society, or the low-interest-rate environment and the search for yield?

How do US monetary policy and fluctuations in the dollar exchange rate affect inflows and outflows in funds?

What impact does this have on portfolio allocation?

And what role does the insurance sector play in absorbing liquidity risks and transmitting monetary-policy shocks?

Benefits of a digital euro

As central banks, we are also actively shaping the future of finance. In the Eurosystem, we are working on a central bank digital currency (CBDC). From our point of view, a CBDC offers many strategic advantages and offers a solution to many of these challenges.

First, a retail CBDC would make the euro and the euro area more resilient to emerging forms of money.

Second, it would make European payments more efficient. Despite a number of initiatives over the years, Europe still does not have a European digital solution for retail payments that can be used throughout the entire euro area.

A third strategic benefit addresses concerns regarding sovereignty and security. The trend towards digital payments is leading to an ever-growing reliance on non-European card schemes and payments solutions provided by non-European big techs.

A digital euro offers a European alternative. Technically, it would run on European infrastructure and would make us less dependent on non-European providers.

The digital euro is intended to be a digital form of central bank money that is accepted all over the euro area and complements conventional central bank money – that is, banknotes and coins – in a meaningful way.

But before a digital euro can be introduced, the necessary legal foundations first need to be staked out by European Union legislators for it to become a key element of sovereignty.

Additional benefits, such as a higher degree of automation and 24/7 availability, could also be leveraged through the introduction of a wholesale CBDC solution. It would enable us to make complex capital-market transactions more efficient. In other words, it would be cheaper, quicker, more transparent and require less coordination. One key characteristic is innovative smart contract-enabled payments.

Looking to the future

At the Bundesbank, we have developed our own technical “trigger solution”, which makes it possible to connect market distributed ledger technology (DLT) platforms with the Eurosystem’s traditional payments system.

This met with considerable interest among market participants during an exploratory phase last year. Our aim is to make tokenised central bank money available to the market as part of a future joint Eurosystem solution.

To achieve this, the Eurosystem is expanding its initiative to settle DLT-based transactions in central bank money. The initiative will follow a two-track approach. First, in the Eurosystem, we are developing an interoperability solution with Target Services. Second, we are exploring a long-term integrated solution, including the settlement of cross-border transactions.

We wish to seize upon the current momentum and ensure that Europe continues to be a pioneer in developing a tokenised financial market infrastructure. This represents the first step towards a more digital ecosystem that we will build in close cooperation with market participants in the years ahead. OMFIF

The writer is member of the executive board of the Deutsche Bundesbank. This article is a condensed version of a keynote speech given at OMFIF’s Future of payments forum in Frankfurt.