The views expressed in this article are solely those of the author and should not be attributed to the European Payments Council.

We spoke with author and digital financial services advisor and commentator David Birch about the role of stablecoins in Europe’s financial landscape. From their impact on competition to their potential to boost European resilience, he offers clear insights into the future of this emerging form of digital money.

1.    Stablecoins are often described as a new form of digital money. From a structural perspective, how do they differ from existing electronic money frameworks in Europe?

Stablecoins are fundamentally different from the existing electronic infrastructure.  

First of all, they operate across public networks or private permissioned networks that are external to the banking and central banking clearing and settlement networks.  

Secondly, they have a fundamental architectural difference in that they do not separate the value transfer from the exchange of messaging.  

To paraphrase McLuhan, the money is the message.  

Thirdly, depending on the issuer, of course, stablecoins are one instance of a more general class of digital asset that might be used to settle transactions.  The rails that are built to move a US dollar stablecoin are the same rails that could be used to move a gold-backed stablecoin, or in fact any other tokenised instrument.

2.    How could stablecoins reshape competition, market structure and innovation dynamics in the European payments ecosystem?

There are a couple of different ways to frame the response to this question.  If we see stablecoins purely as a payment mechanism to compete with existing solutions, then it is not obvious that they have a significant role to play in Europe other than for some cross-border business-to-business use cases.  While it is true that there are a range of jurisdictions outside Europe that face the real issue of pervasive dollarisation, this is simply not the case for Europe in the foreseeable future.  

Personally, I see stablecoins in a different light:  There is considerable discussion going on right now about enhancing the reliability of regional payment systems and, in the case of Europe, reducing the independence on US infrastructure.  

The potential for stablecoins to provide parallel infrastructure that enhances European resilience should be explored more carefully.

3.    Payments rely heavily on trust. What will be most important in building public confidence in stablecoins?

It is entirely possible that stablecoins will never be used explicitly in mainstream solutions.  Apart from anything else, the general public don’t care about infrastructure and if they authorise a payment to IKEA on their phone, then I cannot imagine that a normal person would then have the slightest interest in whether the value is transferred through an ISO 8583 pull, an ISO 20022 push, an ERC20 coin or a CBDC balance.

Is it possible that stablecoins will be integrated by institutions to reduce clearing and settlement costs? To me this seems obvious; institutions are not interested in the ideological discussions about decentralisation but they are interested in reducing costs.

4.    In the long term, do you see stablecoins remaining a separate category, or becoming part of mainstream payment systems?

Actually I’ve just submitted a paper co-written with Simon Taylor of Tempo on this very topic to the Journal of Payment Strategy and Systems.

My view is that in the long-term stablecoins will not really matter very much because the next generation financial market infrastructure (FMI) will be based on more generalised token exchange. Much as the Bank for International Settlements (BIS) describe in their ‘Finternet’ model, the continuous exchange of liquid assets in digital markets will form the basis of a wholly new way of exchanging value.

In a future in which such assets can be traded 24/7, one must ask why organisations would ever “cash out” of those assets in order to exchange fiat currency, even if the fiat currency remains the unit of the account!