May 31, 2023

Regulation and risk: Factors driving demand for a euro-backed stablecoin

Stablecoins are a type of cryptocurrency offering investors price stability. The most popular stablecoins are those backed by the United States dollar — the world’s leading reserve currency. Others are less popular and not widely used, so many may not have heard of alternatives if they haven’t searched for them.

According to data from the International Monetary Fund, the euro is the world’s second most widely held reserve currency, behind the U.S. dollar and ahead of the Chinese yuan. The euro is the official currency of the eurozone, comprising 20 of 27 member states of the European Union (EU), with over 300 million people using it as their base currency.

In the cryptocurrency space, the euro is widely adopted by cryptocurrency trading platforms serving users in EU countries. Yet when it comes to stablecoins, euro-backed options are not as popular, with the most prominent ones offered by leading stablecoin providers.

Leading euro-backed stablecoins fall behind

The world’s largest stablecoin issuers, Tether and Circle, have euro-backed stablecoins in circulation. Euro Tether (EURT) has over 200 million tokens in circulation but is dwarfed by the U.S. dollar-backed Tether (USDT), with 70.9 billion circulating tokens.

Similarly, Circle’s Euro Coin (EUROC) has nearly 32 million circulating tokens, while its U.S. dollar-backed stablecoin USD Coin (USDC) has a circulating supply of over 42 billion. Cointelegraph reached out to Circle for comment on these figures. The company highlighted EUROC’s growing adoption, with the Nasdaq-listed cryptocurrency exchange Coinbase recently announcing its listing.

EUROC is less than one year old, launching in June 2022. USDC, on the other hand, was launched in 2018 by the Centre Consortium, of which both Circle and Coinbase are founding members.

Speaking to Cointelegraph, Danny Talwar, head of tax at crypto tax calculator Koinly, said that a widely adopted euro stablecoin would be “absolutely” beneficial for cryptocurrency markets, as it could “allow for faster on-ramps and off-ramps to and from exchanges and DeFi protocols.”

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Nevertheless, when looking at the circulating supply of U.S. dollar and euro-backed stablecoins, Talwar said that “demand globally remains for U.S.-dollar-denominated stablecoins, with the euro experiencing heightened volatility over the past 12 months.”

The recent rise in interest rates has sparked concerns over the ability of some eurozone economies to withstand their impact. The European Central Bank has already raised its rate to 2.5%, which remains significantly lower than the current federal funds rate of 4.50% to 4.75% in the United States.

Would a popular euro stablecoin be positive for crypto?

While rising interest rates pose significant risks, they also bring in new opportunities, especially for those with cash lying around. Stablecoin issuers like Tether and Circle back circulating tokens with equivalent reserves, allowing them to benefit from higher rates. While the interest is there, stablecoins only grow if user demand exists.

Speaking to Cointelegraph, a Tether spokesperson noted that a widely adopted euro stablecoin could be positive for the cryptocurrency space, as it “provides a faster, less costly option for asset transfer to anyone with a cryptocurrency wallet.” For Tether, it could “represent another step forward n the journey toward increased financial access.” The spokesperson added:

“Stablecoins demonstrate more and more their usefulness as a store of value, as they provide more stability, a form of remittance, a hedge against central bank policymakers who seek to influence their domestic currencies, and a much cheaper form of accessing financial services.”

Such a stablecoin, the spokesperson said, would reinforce the euro, the same way USDT reinforces the U.S. dollar as one of the most “dominant currencies across the globe.” While introducing an “opportunity for many markets, as it also acts as an on-ramp to the decentralized finance ecosystem.”

They said Tether is more interested in introducing a stablecoin backed by the euro to emerging markets instead of European markets. This is because the firm believes people in emerging markets have a greater demand for stablecoins backed by stable fiat currencies. These stablecoins can help people “protect themselves from high devaluation of their national currency.”

A stablecoin’s usefulness as a store of value, for remittances, and as a hedge against currency devaluation could help it increase financial access for people worldwide and boost demand for it.

Demand for a euro stablecoin

As users buy more of a stablecoin, its reserves swell, and the company managing it can bring in more cash through treasuries and other cash equivalents.

Demand for a stablecoin backed by the euro and representing a blockchain-based version of the eurozone currency makes sense. Speaking to Cointelegraph, Lucas Kiely, chief information officer of Yield App, said that most stablecoins are currently denominated in dollars. However, “for those who want to hold their euros on-chain without taking on the EUR/USD currency risk, a euro stablecoin provides that capability.”

According to Kiely, there’s no reason a euro-denominated stablecoin shouldn’t compete with U.S. dollar-denominated stablecoins, given the euro’s status as a global reserve currency. He said that euro-backed stablecoins “need to have greater adoption before they become more prevalent,” adding:

”Ultimately, it boils down to whether people want to hold the euro natively or speculate on EUR/USD prices, and whether regulators are willing to accept third-party euro coin issuance.”

He added that the Markets in Crypto-Assets (MiCA) regulation, set to be voted on by the European Parliament in April, will significantly impact the future of stablecoin development.

Regulations matter

The outcome of the vote on MiCA will determine the regulatory requirements and framework for stablecoin issuers operating in the European Union, with potentially far-reaching implications in the broader cryptocurrency market.

Kiely said that regulators have adopted a “light touch to crypto regulation,” allowing innovation to thrive, but increased regulation “doesn’t need to spell doom and gloom.”

Tether’s spokesperson told Cointelegraph that MiCA will bring “heavy circulation restrictions on non-euro denominated stablecoins in Europe used as a means of exchange in this way,” adding that the stablecoin issuer is looking forward “to continuing to work with regulators to cement the existence of digital currencies and stablecoin as a staple of economic freedom and innovation.”

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Tether further expressed hope for greater regulation of the stablecoin industry, emphasizing the need for regulatory clarity in the crypto market, especially for larger corporations, institutions and fintech companies looking to enter the space.

They said that regulatory clarity would benefit stablecoin issuers and help modernize the payments system and increase access to the financial system.

Blockchain-based versions of fiat currencies have several advantages over fiat currencies, thanks to their use of distributed ledger technology. As financial regulators address the risks associated with stablecoins, they should articulate the larger goal of advancing financial innovation and promoting greater financial inclusion.