EU under pressure to update CBDC, tokenization regulation

Despite its landmark Markets in Crypto Assets (MiCA) regulation coming fully into force in January, the European Union is under pressure from the European Central Bank (ECB) and a leading trade body to introduce new regulation so that it does not fall behind its international peers.

ECB President Christine Lagarde on Monday urged European lawmakers to speed up the introduction of legislation backing the launch of a digital euro. Meanwhile, a few days earlier, the European Fund and Asset Management Association (EFAMA) published a guide recommending an updated regulatory framework for tokenization.

ECB wants digital Euro framework

The EU has been exploring the possibility of a digital euro central bank digital currency (CBDC) for several years. The European Commission proposed digital euro legislation in June 2023, and the ECB launched the digital euro “preparation phase” in November of that year, but progress has been slow since then.

In February, the ECB announced it was expanding its initiative to settle transactions between institutions with a wholesale CBDC payment system. The following month, ECB President Lagarde reaffirmed the bank’s commitment to the project, saying that the team behind the digital euro was “focused on accelerating the pace” and highlighting how they are campaigning to get other key stakeholders on board.

More recently, on May 5, the ECB announced that it had established an “innovation platform” to collaborate with European stakeholders on the digital euro project. The project’s testing phase is scheduled to end by October, after which the ECB will publish a final report and decide whether to issue a CBDC.

However, to do so, it would need the European Parliament to pass legislation, which has not been forthcoming.

On Monday, Lagarde renewed her plea to the European Parliament, describing the digital euro as key to Europe’s financial autonomy and taking aim at competing, privately issued digital currencies known as stablecoins.

“A legislative framework to pave the way for the potential introduction of a digital euro should be put in place rapidly, please,” Lagarde told a hearing of the Committee on Economic and Monetary Affairs of the European Parliament on June 23.

Legislation on a digital euro has been hampered by indecision and doubt from EU lawmakers. Fresh doubts were raised in February when an outage in the ECB’s pan-European TARGET 2 Securities (T2S) platform, which is used to complete trades in cash and securities across the 24 countries that share the euro, along with the central banks and the ECB itself, reported a glitch in its communication channels.

In the end, the outage was fixed fairly swiftly, lasting only 10 hours, but the short-term chaos it caused was enough to raise questions about the central bank’s ability to deliver a digital euro project.

To win back support for the project and add a sense of regulatory urgency to the mix, Lagarde pointed to the risks posed by the growing stablecoin market, particularly in the United States.

“Stablecoins are privately issued and notably pose risks for monetary policy and financial stability,” said Lagarde. “These assets are not always able to maintain their fixed value, compromising their usefulness as a means of payment and a store of value.”

Lagarde also noted that most major jurisdictions, including the United States, still do not have regulatory frameworks in place for stablecoins, and the issuer of the largest stablecoin, Tether, was based in El Salvador, “which lacks any prudential framework” for this product. Further, she suggested that a potential shift in deposits used for payments and savings—from banks to stablecoins—could adversely affect monetary policy transmission through banks.

While praising the MiCA regulation for its “sound rules” related to stablecoins, “minimizing the risks for consumers and financial stability,” Lagarde insisted that, in the context of the growing stablecoin market and the influence of the U.S., “accelerating progress towards a digital euro is a strategic priority.”

She argued that, beyond addressing some of the risks posed by stablecoins, “a digital euro would help safeguard Europe’s bank-based financial and monetary system. Not only would it strengthen Europe’s strategic autonomy, but it would also ensure an innovative and resilient European retail payments system.”

To conclude her pitch for the digital euro, Lagarde quoted the French writer Émile Souvestre, who observed, “there is something more powerful than strength, than courage, than genius itself: it is the idea whose time has come.”

However, the ECB president wasn’t the only one turning up the heat on the legislative efforts of EU lawmakers this week.

EFAMA calls for tokenization legislation and changes to DLT Pilot regime

“A number of European jurisdictions have emerged as hubs for DLT assets, powered by national legal frameworks on custody and transfer of digital securities, as well as the broader European framework on non-traditional crypto-assets (MiCA) and trading and settlement (DLT Pilot Regime),” said EFAMA. “The level of activity among firms shows how important a digital strategy is for adapting to the future tokenized economy.”

According to data from Horizon Grand View Research, the European tokenization market generated revenue of $821.4 million in 2024 and is expected to grow at a compound annual growth rate (CAGR) of 20.9% from 2025 to 2030.

To support this booming market, EFAMA recommended increased regulatory convergence between divergent national rules on digital assets across the bloc’s 27 member states, saying that “stronger convergence would prevent regulatory arbitrage and help promote scale in DLT-based investment funds.”

This convergence would include the regulatory frameworks for traditional assets, such as MiFID II, and those for digital assets, namely the DLT Pilot Regime and MiCA.

“As DeFi grows, there should be no distinction between the traditional ecosystem and the DLT-based ecosystem, but rather a single, integrated financial ecosystem,” said EFAMA.

Another change it argued for was regulatory clarification to support the uptake of tokenized money market funds (t-MMFs)—regular money market funds that are turned into digital tokens on a blockchain—as collateral in derivatives margining and repurchase transactions.

“Every effort should be made by regulators, central banks, and the industry to ensure that t-MMFs are utilized to their full potential,” argued the trade association. “The EU will need to prioritize streamlined policies and practical initiatives—beyond what MiCA’s and DLT Pilot’s are delivering—to foster tokenized asset growth in Europe.”

In this regard, EFAMA also proposed a clear level playing field for cash-on-chain solutions and fostering a competitive landscape that includes a digital euro, MiCA-regulated stablecoins, and commercial bank money tokens. This, it argued, would be “the optimal outcome signaling that Europe is open to innovation and market-led forces.”

The alternative, warned the trade body, would be failing to keep pace with developments in other jurisdictions and, in doing so, ceding the early advantage that the EU acquired with the DLT Pilot and the landmark MiCA regulation, at a crucial time “where scale is everything.”

This was emphasized by Peter Kerstens, advisor to the European Commission, who said in the report that “in the race to establish dominance in DLT, we don’t want Europe to become a flyover zone between the U.S., the Middle East, and Asia.”

On the subject of the EU’s DLT pilot regime, EFAMA’s most pressing proposal was an “immediate increase” to threshold limits imposed to “increase available liquidity on DLT platforms and enhance trading volumes in the secondary market.”

DLT Pilot limits

The DLT Pilot Regime was initiated in March 2023 to create a market infrastructure for trading financial instruments based on distributed ledger technology (DLT).

It provided the legal framework for trading and settlement of transactions in digital assets that qualify as financial instruments under MiFID II, while facilitating the set-up of new types of market infrastructures, including DLT multilateral trading facility, DLT settlement system, and DLT trading and settlement system.

The DLT Pilot currently only applies to shares and units in collective investment undertakings of less than €500 million ($580.9 million) and debt securities with an issue size of less than €1 billion ($1.16 billion). It also imposes a DLT market infrastructure limit of €6 billion ($6.9 billion). Where this is exceeded, the operators of the DLT market infrastructure would be required to activate a special transition strategy to reduce the trading activity on their platform.

In its guide, EFAMA argued that the DLT Pilot Regime should be amended to increase thresholds on eligible instruments.

“This will have an immediate positive effect on i) market interest in providing DLT-based trading and settlement platforms and ii) available liquidity on such platforms and enhanced trading volumes in the secondary market,” said the trade body.

However, the guide did not specify what the new limits should be.

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