WEEKLY - the CBDC veil, tokenization rules
plus, an inspiring Tiny Desk concert
Hello everyone! I hope you’re doing well!
You’re reading the free weekly Crypto is Macro Now, where I reshare/update a couple of posts from the week, and include something from outside the crypto/macro sphere that is currently inspiring me (it’s a fascinating world out there).
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In this newsletter:
Lifting the CBDC veil: what the ECB is really saying
Tokenization: new rules are needed
Some of the topics discussed in this week’s dailies:
The gold run
Hard to get
What this means for Bitcoin
A year ago: tokenization, metaverse and a BTC breakthrough
BlackRock’s tokenization game
Tokenization: new rules are needed
China’s metaverse plans
The macro mood, a year ago
The crypto mood, a year ago
Questioning the Fed’s relevance
Crypto blues
A poll on audio
**CBDC update: the EU, Russia, Thailand and a sector survey**
The veil is lifted: what the ECB is really saying
CBDC plans are brought forward, but more are wavering
Russia’s CBDC to launch in July
Thailand: A government-issued stablecoin
Lifting the CBDC veil: what the ECB is really saying
Since the US inauguration, President Donald Trump has been causing consternation and on occasion panic in government offices around the world. This is true even in the staid halls of central banks, where officials are freaking out about economic impact, bond yields and more.
The areas under pressure include central bank digital currencies (CBDCs). Just a few days after taking office, Trump signed an Executive Order promising no US CBDC. You’d think that would give other central banks a breather in their plans, and perhaps even put some on hold – if the US doesn’t think it makes sense, perhaps the idea should be revisited?
Or, if you’re the European Central Bank (ECB), you could take Trump’s comments as a sign you have to accelerate your digital euro plans. And in so doing, you reveal the real motivation all along.
Photo by Finn Protzmann on Unsplash
Care for the consumer?
For the past couple of years, European central bankers have been dressing up the digital euro initiative as a way to give consumers “what they want”, which is of course a pan-European digital payment platform. I wrote recently about ECB executive board member Piero Cipollone’s attempts to convince us that we are dissatisfied with our inability to use just one platform for all our domestic and cross-border payment needs.
Yet it seems few were convinced, with doubts emerging even within the CBDC team. In December, the European Parliament “rapporteur” – Stefan Berger, the representative responsible for steering the project through the legislative process since August 2023 – stepped down, citing opposition to the focus on a retail CBDC.
And in January, Bundesbank board member Burkhard Balz gave an interview in which he stressed the need for a CBDC in the face of growing concern about US and Chinese payment platform dominance in Europe. Chinese? Yes, it turns out that Alipay is increasingly used on the continent – at the recent European Football Championship held in Germany last summer, the Chinese payments platform was an official sponsor.
Balz’s comments started to reveal that it wasn’t about the consumer after all – it was about European dependence on foreign platforms. Or was it?
The day after the US President signed a crypto Executive Order promising to promote worldwide use of dollar-backed stablecoins, Cipollone said at a conference:
“I guess the key word here is ‘worldwide’ … This solution, you all know, further disintermediates banks as they lose fees, they lose clients ... That's why we need a digital euro.” (quoted via Reuters)
Because a digital euro is all about protecting banks? Actually, no.
Cipollone gave more detail in an interview with Reuters last week, confirming that work on the digital euro project was now being accelerated because of Trump’s stablecoin remarks.
“My sense is that there is an increased sense of urgency because of the position that has been taken by the new US Administration. The fact that the US President went in so strong on this idea of promoting worldwide US dollar-denominated stablecoins obviously is a signal.”
Cipollone went on to give examples, such as PayPal’s stablecoin, of how dollar-backed stablecoins could become the more convenient option for European residents as well as tourists.
Now we’re getting closer to the real reason the ECB is going ahead with the digital euro: protecting demand for the EU currency. It’s not about consumer convenience as they originally insisted; it’s not about protecting banks; it’s about ensuring euro circulation. Politicians and central bankers not being totally honest about the motives is not a surprise – what is notable is the panicked abandonment of the pretence.
Read on, though, because there’s still one more layer to peel back.
Banking structure
The ECB panic is about more monetary policy – it could end up having deep political consequences.
In a scramble to “save” euro demand, a central bank is wading into competition with private businesses.
The ECB is not only competing with the commercial banks it is tasked with regulating, siphoning off deposits into the central bank-issued digital wallets. The cost to banks will depend on the balance limits – we don’t yet know what these will be, as the ECB has said it will be determined according to the economic situation at launch, which sounds unsettlingly vague. A study released last year showed that, if the oft-cited cap of €3,000 is applied, a 40% takeup would reduce bank profits by €8.8 billion a year. With 100% takeup, only 8% of the eurozone’s 714 institutions would meet legally required liquidity buffers.
The central bank is also competing with non-bank payment platforms such as Visa, Mastercard and Alipay, while doing little to remove the structural barriers to a European equivalent. This goes beyond oppressive regulation and constrained venture funds – it’s largely to do with the fragmented marketplace. The EU may have a common currency and customs union, but it does not have unified banking or payments regulation. And, given the power of entrenched interests, it’s unfortunately unlikely to be able to overcome that any time soon.
Stay with me, we’re getting closer to the bigger message.
What’s the problem?
Speaking at an event last week, Federal Reserve Governor Chris Waller spoke about CBDCs, insisting that he didn’t see what market problem they would solve. He made an exception, however, acknowledging that a retail CBDC could make sense “if you have a bad banking system”. As a European, I can confirm that the digital payments here are convenient, fast and relatively cheap (I haven’t seen a paper cheque in decades, unlike my US friends), so perhaps he wasn’t making a direct dig at the EU.
Or wait, maybe he was. When asked a direct question about the digital euro, Waller said:
“We do not use taxpayer dollars to go out and directly compete with the private sector. That’s purely a philosophical point. So the ECB is free to do whatever they want, but that argument would not fly in the US.”
Then again, some of Waller’s comments no doubt deepened the ECB’s concern:
“These things are going to broaden the reach of the dollar across the globe.”
He continued:
“It’s a lot harder to stop stablecoins than confiscating currencies.”
You can see how that would make European central bankers nervous.
Waller went on to pose a question that gets to the main issue – if the central bank is “back of the house”, dealing with flows between banks, and commercial banks are “front of the house”, dealing with the public, then:
“What I would like to know is, what is wrong with that model? What has changed that requires the central bank to now get out in front of the house?”
I think that reveals the systemically important message here, one that will have political ramifications.
There is an understandable fear of euro demand being pushed out by consumer preference for dollar-backed stablecoins. But that’s a market consideration, which should be solved by market solutions.
No, what the ECB is doing is much deeper. It’s publicly acknowledging a lack of confidence in the ability of European banks to do anything about the threat to euro consumer payments.
It’s not so much a “defanging” of European banks, as the public admission they never had fangs in the first place. And it’s a recognition that the internal divisions are so entrenched that banking union is a distant dream.
Public-facing banking services should be handled by commercial banks. The European Central Bank doesn’t think that commercial banks will be effective in competing with dollar-backed stablecoins. So, it’s moving into what has in recent history been a private business.
Contrast this with the US approach, which is to let markets solve market problems. And, look at it next to the recent flurry of European promises to “invigorate” innovation and competitiveness.
The likely lack of success in the latter will only continue to widen the demand gap between euro and dollar instruments, which suggests that the ECB could see fit to get even more involved in demand stimulation. And as we know, increasing public control of commercial marketplaces does not, generally, lead anywhere good.
Tokenization: new rules are needed
Every couple of weeks in the premium daily newsletter, I look back at what I was focusing on a year ago, and why. In part, it’s to hold myself accountable (was I worrying about the right things, did my optimistic predictions come true?), and also it’s to keep track of projects and ideas that back then seemed interesting – what became of them?
We spend so much time racing forward that we don’t do enough updating and reconciling. This is unfortunate since progress without context is just movement, news without follow-through is just noise.
One piece I wrote last year about tokenization is still just as relevant today. It addressed the regulatory mantra of “same activity, same rules”, which is the European approach towards digital assets. The context was a debate on stage at Davos, with Circle’s Jeremy Allaire presenting an eloquent summary of why that’s unnecessarily limiting. Without drafting technology-specific regulation, markets will never be able to harness blockchain efficiencies – for instance, in Europe, tokenized securities fall under existing securities rules, which specify centralized fiat settlement.
There is hope that the US will take a different approach. In this, it could be an advantage that its markets framework is fragmented, with derivatives and securities regulated by different agencies. Put differently, the US structure already recognizes that different types of assets behave differently and therefore need different approaches. This may be up for debate under the new Administration since the difference is narrowing, but the advantages of specialization could give some momentum to the idea of a new agency for blockchain-based assets. Unlike Europe’s static “same activity, same rules” approach, the US is more likely to go for a technology-first rather than regulation-first approach.
This is not saying that the technology should be regulated – it shouldn’t, it’s a tool, and when it comes to protection, the outcomes are what matter. But carving out an oversight structure for all digital assets would be an acknowledgement that new tools produce new outcomes, while allowing for flexibility while we figure out what those outcomes are.
HAVE A GREAT WEEKEND!
(in this section, I share stuff that has NOTHING to do with macro or crypto, ‘cos it’s the weekend and life is interesting)
I’ve shared before my fondness for NPR’s Tiny Desk concerts. An astonishing range of artists gather in an eclectic corner in front of a camera and behind a desk. Out of the clutter and the crowding emerges a sound that feels more authentic than professional studio mixes, a reminder that the music matters more than the production.
One of my favourites is this performance by Fred again.., an electronic artist known for his eclectic compositions which include melody, percussion, his own voice as well as snippets of songs and poems sung and spoken by others. In this Tiny Desk concert he crams a lot of screens, instruments and computers into a space not much bigger than your kitchen table – the result is an experience that feels more like a musical landscape than a song.
DISCLAIMER: I never give trading ideas, and NOTHING I say is investment advice! I hold some BTC, ETH and a tiny amount of some smaller tokens, but they’re all long-term holdings – I don’t trade.