The market capitalization of Tether (USDT), a United States dollar-pegged stablecoin, is currently over $65 billion. USD Coin (USDC), another stablecoin backed by the U.S. dollar, clocks in near $55 billion. Some reports estimate that the total market cap of dollar-backed stablecoins is over $160 billion.
Despite this success of dollar-based stablecoins, there has not been a euro stablecoin that is even remotely comparable in size. By the end of June, the U.S.-based company Circle announced that it will launch its own euro stablecoin, Euro Coin (EUROC), on the Ethereum blockchain. With a euro-based stablecoin, uncomplicated euro transfers will be possible worldwide in the future, as is currently the case with the U.S. dollar.
Instead of the eurozone-based business, Circle has opted to issue the planned euro stablecoin via the U.S. bank Silvergate. But, is it permissible for a digital coin tied to the euro to be issued outside the eurozone? How will European regulators react? Can Circle simply ignore the upcoming Markets in Crypto-Assets Regulation (MiCA) and operate the stablecoin from outside the European Union? And, why is there still no major euro stablecoin?
Cointelegraph auf Deutsch asked these questions to Patrick Hansen. The former head of blockchain at the German digital association Bitkom was, until recently, head of strategy and business development at wallet provider Unstoppable Finance. Now Hansen advises companies such as Presight Capital and the Blockchain Founders Group and has a hotline to the European Parliament.
Euro stablecoin issued outside the EU
The European Central Bank (ECB) is keeping its options open on whether and when to launch a digital euro. However, it’s still not really clear to Patrick Hansen what exactly the ECB wants to achieve with a central bank-issued digital euro. “Whether it is to become a kind of digital cash or rather a new payment option. That’s why it's so difficult to evaluate the project,” he said.
Fundamentally, though, Hansen thinks that private companies, led and overseen by policymakers, are better suited to bring innovation to the current financial system. According to him, European banks will be much more active in the coming years: “Right now, I think two things, in particular, are holding them back. First, banks want to wait for MiCA regulation, and second, the ECB’s specific plans for a digital euro are still not clear.”
That’s why Hansen is a big fan of Circle’s decision to launch a euro stablecoin. The euro accounts for almost 40% of global SWIFT payments, 20% of global foreign reserves, but only 0.2% of global stablecoin market capitalization. “It is in the EU's and the eurozone's interest to change that. EUROC is a promising step in that direction,” Hansen said.
MiCA regulation is unavoidable
In Hansen’s opinion, MiCA automatically kicks in here since it’s a euro stablecoin. Circle cannot avoid applying for the appropriate licenses in the EU and having the EUROC supervised by EU authorities. But this is, Hansen thinks, also Circle’s intention.
According to Hansen, Circle will probably set up a European legal entity and then apply for an e-money license, which is a prerequisite for issuing e-money tokens. Depending on how widely the coin is adopted, EUROC already falls into the category of “Significant e-money-tokens” in the MiCA, which again entails higher capital reserves, liquidity and interoperability requirements.
“Circle could also theoretically use the liability umbrella of an existing e-money institution and cooperate with it. That would be a slightly more complex process operationally and legally,” Hansen explained, adding:
Circle’s euro stablecoin is supposed to be backed one-to-one by euros deposited in bank accounts. However, the reserves are held by the U.S. bank Silvergate while Circle itself is based in the United States. How then can the new euro coin be regulated with the upcoming MiCA regulation?
“In terms of USDC, Circle’s primary stablecoin pegged to the U.S. dollar, Circle could refrain from applying for a MiCA license. The pros and cons, for example, that unregulated stablecoins may no longer be listed by regulated crypto trading venues in the EU, need to be weighed here. However, I don’t see any way for EUROC to circumvent MiCA.”
According to Hansen, regulation can promote legal certainty, trust and adoption, but on the other hand, it can create high barriers to market entry. In the area of stablecoins and nonfungible tokens (NFTs), MiCA goes a step too far and threatens to become a major hurdle for many companies, Hansen said.
Still no significant euro stablecoin
Also playing a role are regulated challenges, the weakness of the euro and the first-mover advantage of U.S. dollar-based stablecoins like USDT and USDC. The network effects of stablecoins are so significant that many Europeans also use USD stablecoins for convenience. In addition, the volatility of crypto assets is usually high and many EU retail investors are comparatively unconcerned about the risk of U.S. dollar usage in the forex market. Hansen said:
Existing euro stablecoins seem to be used less and, according to Hansen, there are several reasons for this. Negative interest rates on bank deposits in the eurozone have made reserve-backed stablecoin business models virtually impossible.
“Fundamentally, however, the demand for a widely used euro stablecoin is huge and many of the points above will get better in the coming months.”
Whether the EUROC will become a big seller similar to the USDC will be decided by the market. Demand, especially from larger financial institutions, for a trustworthy and regulatory-approved euro stablecoin is high, Hansen said.
However, he is sure that euro stablecoins won’t be able to keep up with U.S. dollar stablecoins, stating the euro can’t do that even outside the crypto world for various reasons. But, those euro stablecoins that clear MiCA hurdles will see strong adoption and usage while increasing the overall market share of euro stablecoins, Hansen said, adding:
“USDC is the undisputed number-one stablecoin in the decentralized finance market. Therefore, there is a good chance that EUROC will also play a good role there. Anyway, I would be happy to see more and more euro-based liquidity pools and euro investment opportunities in the DeFi space.”