Central bank digital currency and monetary sovereignty

Calls for a digital euro increasingly invoke monetary sovereignty, often on the grounds that Europe must retain control over its payment systems. This column argues that this reasoning conflates two distinct elements within the monetary system: money and payments. Sovereignty has never depended on universal access to public money or control over payment rails, but on legal authority over the unit of account and the capacity of the central bank balance sheet to absorb risk. Private money anchored by public backstops is the historical norm. The main competitive challenge today arises at the level of broad money, where stablecoins compete with bank deposits rather than with cash or central bank money. In this context, the digital euro is best understood as a symbolic response to payment-system dependence and fiscal fragmentation, rather than a functional requirement for monetary sovereignty.

The European Central Bank’s work on a digital euro has increasingly been framed as a matter of monetary sovereignty. In recent submissions to the European Parliament, a number of economists have argued that without a retail central bank digital currency (CBDC), Europe risks ceding control over its monetary system to foreign payment providers, BigTech platforms, and private digital monies. These concerns deserve to be taken seriously. Yet, much of the current debate risks obscuring more than it clarifies.

This column makes two related claims. First, monetary history suggests that CBDC is not a necessary condition for preserving a public monetary anchor. Second, many sovereignty arguments rest on a category mistake: the conflation of money with payments.

The first claim follows directly from the historical record. Money has never been a purely public institution. Across centuries, it has taken the form of a hybrid arrangement, combining a publicly defined unit of account with privately issued instruments. Medieval Europe relied heavily on bills of exchange issued by merchant banks; early modern trade was settled through clearing mechanisms rather than sovereign coin; and 19th century free banking systems were dominated by privately issued banknotes anchored by convertibility into specie (Spufford 2009, Sargent and Velde 2002, Gorton 1988). Stability did not hinge on universal access to public money, but on credible public backing and enforcement of par value.

The modern monetary system continues this tradition. Bank deposits – private liabilities – are the dominant form of money, supported by deposit insurance, regulation, and lender-of-last-resort facilities. Even cash, often portrayed as the paradigmatic public monetary instrument, has played a limited economic role and has rarely functioned as the primary store of value (Goodhart 1988). Its apparent status as a civic institution reflects 20th century technology and habit more than any deep constitutional principle.

Recent financial crises reinforce this interpretation. In the global financial crisis, the euro area sovereign crisis, the COVID-19 shock, and the 2023 banking turmoil, stability was preserved not by flights into cash but by large-scale expansions of central bank balance sheets via issuance of reserves. Risk absorption occurred overwhelmingly at the wholesale level, with central banks intermediating liquidity and solvency support to private institutions. The decisive public function operated through balance-sheet backstopping rather than through retail access to public money.

Historically, access to central bank balance sheets has been broader than access to reserves. In the US, primary dealers gained access to facilities functionally equivalent to the discount window during crises – such as the Primary Dealer Credit Facility in 2008 and 2020 – despite not holding reserve accounts. Money market funds and other non-bank institutions were stabilised through dedicated facilities without ever receiving reserves directly.

A similar logic applies in the euro area. Access to the Eurosystem’s balance sheet has long extended beyond institutions with regular access to reserves or standing facilities. During the global financial crisis and the sovereign debt crisis, the ECB absorbed risk primarily through banks, but also through a widening set of collateral frameworks, targeted longer-term refinancing operations, and emergency liquidity assistance (ELA), which allowed national central banks to provide liquidity to institutions that would not normally qualify as monetary policy counterparties. More recently, market-wide interventions – such as the Pandemic Emergency Purchase Programme (PEPP) – stabilised a broad range of non-bank balance sheets without granting direct reserve access. As in the US, these arrangements illustrate that monetary sovereignty is exercised through discretionary balance-sheet expansion and crisis instruments, not through universal or permanent access to central bank money.

From this perspective, what matters for monetary stability and sovereignty is not retail access to central bank liabilities, but the capacity of the central bank to absorb risk and enforce par convertibility across private monies (Adrian and Mancini-Griffoli 2019, Reichlin 2025a, 2025b, 2025c).

Key issues for financial stability and monetary sovereignty arise in relation to privately issued forms of broad money, such as stablecoins. Stablecoins function as means of payment and stores of value for on-chain activity. It is at this level – where bank deposits currently dominate – that monetary competition will take place.

A lightly used, capped, and non-remunerated CBDC is unlikely to be the instrument that disciplines or displaces large-scale stablecoin adoption, particularly when stablecoins are embedded in global platforms and denominated in foreign currencies. To the extent that stablecoins pose a challenge to monetary sovereignty, this challenge arises in the domain of broad money and payment networks. It is therefore more credibly addressed through regulation of stablecoins – in relation to their reserve backing – than through the introduction of a retail CBDC (Reichlin 2025b, 2025d).

The second claim concerns the structure of the sovereignty argument itself, and the way it frames the policy problem. Many calls for a digital euro implicitly equate monetary sovereignty with control over payment instruments and infrastructures. This is a conceptual error. Money and payments are related but distinct components within the monetary system. ‘Money’ refers to the settlement asset, and the unit of account – what has been transferred, and in what quantity, when payment has been made.  ‘Payments’ refers to the means by which the transaction takes place – which might be an inter-bank transfer using existing banking infrastructure, or it might be a series of entries on a blockchain.

This distinction is not semantic. Europe can lose control over payment rails without losing monetary sovereignty, just as it can retain monetary sovereignty while relying extensively on private or foreign payment providers. The euro’s unit of account is defined and enforced by law; its value is stabilised by the ECB’s balance sheet; and par convertibility across bank deposits is guaranteed by regulation and public backstops. None of these pillars requires the ECB to issue a retail CBDC.

Many of the concrete concerns raised in the sovereignty debate – dependence on foreign card networks, dominance of BigTech wallets, data extraction through payment platforms – are therefore primarily payment system issues. They call for competition policy, regulation, interoperability mandates, and the development of European payment infrastructures. Addressing them through CBDC risks overloading a monetary instrument with objectives that properly belong to payments policy.

Seen in this light, the digital euro addresses a different, more institutional problem. In the euro area, monetary union without full fiscal integration creates a persistent legitimacy gap. As cash use declines, the visibility of public money diminishes, while crisis management increasingly relies on opaque balance-sheet operations. A digital euro can thus be understood as a symbolic and constitutional response to fiscal fragmentation, reaffirming the presence of public money in a digital economy.

This symbolic role should not be dismissed. Symbols matter in monetary unions. But it should not be overstated either. The deliberately constrained design of the digital euro – non-remuneration, holding limits, and intermediated distribution – signals that it is not intended to replace private money, enhance payment efficiency, or materially improve crisis management. Its contribution to sovereignty is therefore indirect and political rather than operational.

In conclusion, the case for CBDC as a prerequisite for monetary sovereignty is weaker than often claimed. History suggests that sovereignty ultimately rests on legal authority and public balance sheets, not on universal access to public money. Confusing money with payments risks misdiagnosing the problem and misallocating policy effort. For Europe, the digital euro may play a useful symbolic role, but the effective defence of monetary sovereignty will continue to depend on regulation, fiscal capacity, and the central bank’s willingness to absorb risk when it matters.

Source : VOXeu