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ECB calls out PayPal, pits CBDCs against stablecoins

In a speech to the Committee on Economic and Monetary Affairs of the European Parliament this week, Fabio Panetta, Member of the Executive Board of the ECB put forward the case for a digital euro and highlighted PayPal’s launch of a stablecoin last month as yet another reason for a European CBDC. 

Arguing that the issuance of a digital euro represents an opportunity, not a risk, for the European financial sector, Panetta said that the ECB is designing a digital euro as a safe payment tool to preserve the role of public money – money backed by the state – while balancing innovation in payments with the stability of the financial sector and guaranteeing privacy

“Our response to the technological revolution in payments cannot be to stand still,” enthused Panetta. “The counterfactual to the digital euro is not a benign status quo. In the absence of a digital euro, the emergence of potentially dominant private actors in the digital payments market could have a strong impact on the financial sector. This is a real possibility, as demonstrated by PayPal’s recent decision to launch its own US dollar-denominated stablecoin for use in digital payments.”

PayPal announced the launch of its PayPal USD stablecoin in August, stating that it is designed to contribute to the opportunity stablecoins offer for payments and is 100% backed by US dollar deposits, short-term US treasuries and similar cash equivalents. PayPal USD is redeemable 1:1 for U.S. dollars and is issued by Paxos Trust Company.  

US PayPal customers that purchase PayPal USD have been be able to transfer the coin between PayPal and compatible external wallets, send person-to-person payments using PYUSD, fund purchases with the stablecoin by selecting it at checkout. And convert any of PayPal's supported cryptocurrencies to and from PayPal USD.

“The shift toward digital currencies requires a stable instrument that is both digitally native and easily connected to fiat currency like the US dollar,” said Dan Schulman, president and CEO, PayPal, at the launch of the digital currency. “Our commitment to responsible innovation and compliance, and our track record delivering new experiences to our customers, provides the foundation necessary to contribute to the growth of digital payments through PayPal USD.”

For Panetta, CBDCs offer social equity in digital payments that cannot be replicated in the private sector, as he stated: “Private providers of payment services, including PayPal, have no incentive to limit the take-up of their stablecoins or the range of services they provide. Quite the opposite: their objective is to expand their customer base and gain market share."

Panetta’s position is that private providers may have no incentive to make their payment solutions compatible with those used today. “They could offer services at low cost, given the revenue they could generate by reinvesting the reserve assets in an environment with positive interest rates,” Panetta said. “And while the market entry of big techs or other large payment providers may initially promote innovation, competition could be severely hampered if they attain a monopolistic position, as we have seen in other digital sectors.”

Positioning a European CBDC as a clear alternative, Panetta outlined that his problems with a privately-backed digital currency would not be the case with a digital euro. “A digital euro would be introduced by public authorities, under a European regulatory framework,” he commented. “It would pay due attention to orderly adjustments in the financial sector while offering payment service providers a platform for innovations with pan-euro area reach.”

Another distinction that Panetta offered is that, unlike the stablecoins issued by big techs, banks and other payment service providers would distribute the digital euro, which would maintain their relationship with their customers. 

“The ECB is actively cooperating with European payment service providers and other stakeholders to ensure that the digital euro would be fully compatible with existing payment tools and attractive to all,” noted Panetta. “In particular… the proposed design of the digital euro would guarantee the highest level of privacy for digital payments.”

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