Europe’s monetary system is entering a decisive phase of transformation as digital finance moves from the margins to the core of everyday payments. At the heart of this shift is a clear message from senior policymakers: commercial banks will need to issue fully digital forms of private money if they want to remain central to the financial system. That message has been articulated most forcefully by Fabio Panetta, whose remarks reflect a broader strategic rethink underway at the European Central Bank.

Panetta’s argument is not framed as technological enthusiasm but as institutional necessity. As money itself becomes increasingly digital, he contends, banks must adapt or risk being sidelined by new forms of privately issued digital value and by foreign-controlled payment infrastructures that already dominate large parts of Europe’s transaction landscape.

The changing nature of money in a digital economy

For decades, the European monetary system has rested on a two-tier structure: central bank money as the ultimate settlement asset, and commercial bank money as the primary means of payment for households and businesses. This arrangement has relied on trust, regulation, and the assumption that different forms of money are interchangeable at face value, regardless of who issues them.

Digitalisation is now testing that assumption. Financial assets are increasingly being issued, transferred, and settled in tokenised form, using distributed ledger technologies that allow near-instant settlement without traditional intermediaries. While efficiency gains are clear, the shift raises fundamental questions about what qualifies as “money” and who should be allowed to issue it.

Panetta has warned that without adaptation, this environment could fragment the monetary system. If private digital instruments proliferate without a stable anchor, the principle that all money trades at par could erode, undermining financial stability and public confidence.

Why stablecoins changed the debate

Much of the urgency stems from the rise of stablecoins—digital tokens typically pegged to a fiat currency, most often the U.S. dollar. While designed to maintain price stability, stablecoins are issued by private entities and circulate outside traditional banking systems.

Panetta has been explicit that stablecoins are unlikely to replace central or commercial bank money outright. However, their growth has forced central bankers to confront a new reality: money-like instruments can now scale rapidly without being embedded in the regulated banking system.

The concern is not only domestic. Stablecoins linked to the dollar reinforce U.S. monetary influence globally, especially in digital markets. Panetta has pointed out that U.S. political support for digital assets reflects a strategic interest in sustaining international demand for the dollar in an increasingly digital global economy.

From a European perspective, this creates both a competitive and a sovereignty challenge.

Why commercial banks must issue digital private money

Panetta’s core argument is that the two-tier monetary system can survive only if both layers evolve. Central bank money is set to become digital through initiatives such as the digital euro. But if commercial bank money remains largely account-based and technologically static, it risks losing relevance in a tokenised economy.

Fully digital private money—issued by banks, regulated, and interoperable with central bank digital currency—would preserve the existing monetary architecture while allowing it to function in new technological environments. Tokenised deposits, for example, could be used in smart contracts, automated settlement systems, and digital marketplaces without breaking the link to the banking system.

In this framework, banks do not disappear; they adapt. Their role shifts from traditional payment processing toward digital issuance, compliance, and integration with programmable financial infrastructure.

The digital euro as a strategic anchor

To ensure that public money remains relevant in this transition, the ECB is advancing plans for a digital euro, with a potential launch later this decade. Panetta has consistently framed the project as defensive rather than disruptive: a way to safeguard monetary sovereignty, not to replace banks.

The digital euro would function as a risk-free settlement asset in a digital environment, providing a reference point against which private digital money can be anchored. Without it, the ECB fears that private platforms—many controlled by non-European firms—could become de facto issuers of money-like instruments.

Panetta’s vision is that commercial banks issue their own digital money alongside the digital euro, preserving the balance between public and private roles that has long defined Europe’s financial system.

Resistance from banks and the limits of the status quo

Despite these arguments, resistance has been strong, particularly from banks concerned about competition from central bank digital currency. Some fear that a digital euro could divert deposits away from banks, weakening their funding base and profitability.

Panetta has challenged this view by reframing the risk. He has argued that banks are already losing control of payments to global technology firms and card networks, many of which are non-European. Companies such as Visa, Mastercard, and PayPal collectively process a majority of Europe’s digital payments.

In his view, focusing narrowly on potential losses from a digital euro ignores the much larger erosion of bank relevance that has already occurred. Issuing digital private money would allow banks to regain technological ground rather than defend a shrinking share of the payments market.

Tokenisation and the future of bank balance sheets

Tokenisation is central to Panetta’s outlook. By converting deposits and other financial claims into digital tokens, banks can make their money compatible with emerging financial ecosystems built on distributed ledgers.

This has implications beyond payments. Tokenised bank money could be used in securities settlement, cross-border transactions, and decentralised finance applications, all while remaining within a regulated framework. The alternative, Panetta suggests, is that unregulated or lightly regulated entities fill the gap.

For banks, the challenge is operational and strategic. Issuing fully digital private money requires new infrastructure, cybersecurity capabilities, and regulatory coordination. But it also opens opportunities to offer new services and remain indispensable intermediaries in a digital economy.

Monetary sovereignty in a fragmented world

Underlying Panetta’s remarks is a geopolitical dimension. Recent global tensions have highlighted the risks of overreliance on foreign-controlled financial infrastructure. Payments, once a technical function, are now seen as a strategic asset.

By encouraging both a digital euro and digital commercial bank money, European policymakers aim to reduce dependence on external systems and preserve autonomy over monetary and financial policy. This is not about isolation, but about ensuring that Europe’s financial system can function independently in a crisis.

Panetta has argued that sovereignty in the digital age is exercised not by resisting innovation, but by shaping it.

The transition Panetta describes is evolutionary rather than revolutionary. Central bank money and commercial bank money remain the anchors of the system, but both change form. Cash becomes less dominant, deposits become tokenised, and settlement increasingly occurs in digital environments.

What remains constant is the principle of par convertibility and public trust. By insisting that banks issue fully digital private money within a regulated framework, policymakers hope to avoid a future in which money fragments into competing digital instruments with varying degrees of reliability.

In Panetta’s view, the choice is not between tradition and innovation, but between controlled adaptation and loss of relevance. For Europe’s banks, issuing fully digital private money is no longer a theoretical possibility—it is becoming a condition for survival in the next phase of the monetary system.

(Adapted from TradingView.com)

Categories: Economy & Finance, Regulations & Legal, Strategy