ECB's Panetta says banks will need to issue fully digital private money

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Commercial banks must tokenise the money they handle

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Stablecoins will spread due to US push to defend dollar

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Only stable pegs are central bank, private banks' money

(Recasts with details, comments)

By Valentina Za and Antonella Cinelli

MILAN, Jan 21 (Reuters) - Commercial bank money is set to become fully digital in the future, like ?central bank money, and the two will continue to anchor the monetary system, a top European Central Bank policymaker said on ?Wednesday.

The growing use of financial assets in digital, or tokenised, form has raised questions about ?the future of the two-tier monetary system that links central bank ?and private money. Some ?experts warn that stablecoins could undermine the principle that all forms of money trade at par and are interchangeable regardless of ?issuer.

Addressing Italy's banking association, Bank of Italy Governor ?Fabio Panetta said it was difficult to predict how stablecoin use would evolve but insisted they would not displace traditional money, which he described as ?the financial system's only stable anchor.

Stablecoins are typically ?referenced to ?a conventional financial asset, mostly the U.S. dollar, to maintain a stable value.

"They'll definitely develop because there's a big push by the U.S. administration," Panetta said, adding Washington encouraged digital ?assets to support dollar demand.

"It's not clear what role they'll have ... but I expect the system will remain centred around central bank and commercial bank money, both of which will need to become digital."

To ensure central bank money remains relevant in an increasingly digital economy and to protect Europe's monetary sovereignty, the ECB aims to launch a digital euro ?in 2029.

"I ?expect commercial bank money will also become mostly tokenised," Panetta said.

Tokenisation refers to converting financial assets into digital tokens issued on a distributed ledger such as blockchain.

The ?digital euro project has faced resistance from banks, particularly in Germany, which fear competition from the ECB.

Panetta said recent geopolitical developments showed it may be risky for Europe to rely on U.S. firms such as Visa, Mastercard (MA) and PayPal (PYPL) for more than two-thirds of its payments.

As an ECB executive board member before becoming central bank governor, Panetta led the digital euro project.

"When I discussed this with the banks ?of a large European country that opposed the digital euro because they worried they'd lose the 30% of payments they handled digitally, I told them: instead of worrying about the 30% think about who controls the 70% you've already ?lost," he said. (Reporting by Valentina Za and Antonella Cinelli. Editing by Cristina Carlevaro and Mark Potter)