- The euro is the second largest currency in the world but has no major stablecoin these days
- Circle’s EUROC is a step in the right direction, experts say, but it will take a while before it becomes mainstream
Stablecoins are predominantly dollar-pegged projects, but the euro comes for its slice of the pie. Circle’s announcement of the EUROC (Euro Coin) last week gave pundits some confidence that there will be a major euro-pegged stablecoin in the near future, although it’s not clear when.
“So far we don’t see any relevant euro stablecoin: very low liquidity and adoption,” Fabian Scholz, co-founder and CEO of Kudona, a Germany-based and Lithuanian-licensed cryptocurrency exchange, told Blockworks.
The euro, shared by 19 European Union member states, is the second largest currency in the world, right behind the US dollar. Despite its global market share of around 19% across various indicators of international currency use, the euro has an insignificant share of stablecoins.
As the crypto ecosystem shrank capital in this bear market, dollar-pegged stablecoins managed to reinforce their dominance as investors sought shelter during these turbulent weeks. Blasts like TerraUSD (UST) notwithstanding, stablecoins are seen as a way to park value without having to withdraw in fiat currency, which often incurs fees.
So far, only a few stablecoins have been pegged to the euro, such as Tether’s EURt – a sister stablecoin to the largest dollar-backed issue USDT – or Stasis’ EURS. Far from the magnitude of dollar-pegged stablecoins, EURt has a market cap of around $218.4 million and EURS’ market cap is around $130.1 million. according to CoinGecko.
according to a Report published last week from the European Central Bank on the international role of the euro, the euro’s share of the crypto markets is “extremely small” at 0.2%. The Eurozone central bank acknowledges that “even though the market is still in its infancy, stablecoins pegged to the euro have started to gain popularity,” but warns that “stablecoins are not seen as a new class of safe-haven asset, but rather as a less volatile but should be considered risky cryptoasset.”
Still, Patrick Hansen, EU policy expert and crypto venture advisor at Presight Capital, believes demand is increasing for a euro-denominated stablecoin, which accounts for up to 40% of global SWIFT payments and 20% of global foreign exchange reserves.
“A widely used and liquid euro stablecoin can enable and enhance a multitude of interesting use cases for European investors and companies: from more efficient entry/exit via crypto/DeFi to remittances and B2B payments, a frictionless crypto FX market and much more,” Hansen told Blockworks.
Kudona’s Scholz predicts that big crypto players like Circle or Binance “may be able to change that, but they will need a few months if not two or three years of adoption to increase liquidity and adoption on the DeFi side.” .
This would be a turning point for European investors as they are exposed to FX (foreign exchange) risk against the dollar. So far in 2022, the euro zone currency has lost 11% of its value against the dollar, and some analysts are predicting that the two currencies will reach parity later this year.
For now, euro-based stablecoins are less liquid and “tend to sell similarly to other risky assets rather than behave like a vehicle in digital transactions and trades,” according to the ECB’s research. At the same time, the institution acknowledges that a euro stablecoin could support the currency’s international profile.
Monetary policy normalization may accelerate adoption
A crucial question for an issuer of a euro-based stablecoin lies squarely within the purview of the ECB. With its -0.5% deposit rate, the European Central Bank is making it harder to maintain a euro-pegged stablecoin with full reserves as issuers have to pay negative rates on bank deposits.
“Negative interest rates on bank deposits are among the key impediments to the development and growth of reserve-backed euro-denominated stablecoins,” Hansen acknowledged.
in one tweet In April, prior to Circle’s announcement, Hansen calculated that the company would have to pay $250 million in interest on its banked euro reserves if it created a euro-pegged stablecoin with a market cap of $50 billion.
On EUROC’s website, Circle addresses the issue: “Circle assumes the interest rate risk for the Euro Coin Reserves, just like we do with USDC,” the company wrote.
But negative interest rates will soon be a thing of the past. The ECB announced that it would raise its key interest rate in both July and September. The deposit facility will follow suit, moving out of negative territory and making it easier to bank large amounts of euro reserves.
“This will undoubtedly be a key change and requirement for euro stablecoin issuers,” predicts Hansen.
Will regulation harm or help euro-pegged stablecoins?
ECB rate hikes come at a crossroads for European regulation towards crypto. The European Union is on the verge of reaching an agreement on Markets in Crypto Assets (MiCA), a landmark law that will shape crypto innovation in the old continent.
“This will no doubt have a significant impact on the euro stablecoin market and I do not expect most euro stablecoin issuers to be able to handle the complex MiCA requirements to the satisfaction of the EU regulator ‘ Hansen said, but added, ‘Those who do will benefit from greater institutional trust and acceptance.’
Market participants are still waiting for the final version of MiCA. “It’s not set in stone yet, so we’ll have to see the final draft,” said Scholz, whose company will be affected by the regulation.
“I’m a fan of regulation because the general idea is usually to protect the consumer, which is essential in finance.”
However, the devil could be in the details. “The question then is what kind of regulation do you have and how is it implemented and affecting businesses. When well thought out, it enables innovation without being too constrained,” said Scholz, who not only shares a name with German Chancellor Olaf Scholz, but is in fact his nephew.
Even the ECB, which is part of the financial regulator in the eurozone, is eyeing a likely greater adoption of a euro stablecoin in the future.
“Potential risks triggered by a more widespread adoption of stablecoins can be managed by the existing Eurosystem supervisory framework,” the ECB concludes, noting the expected MiCA regulation and international cooperation in the regulation of crypto assets.
And meanwhile as President Christine Lagarde said recentlylegislators may need to work on MiCA 2.0.
The post Will euro stablecoins like EUROC go mainstream? is not financial advice.
Source: Crypto News Austria