Europe Must Urgently Act to Accelerate Regulation and Growth of Euro-Denominated Stablecoins
by Elliot Hentov, State street global advisors, co-authored by christina corrigan on behalf of stablecoin standard
In the rapidly evolving landscape of digital finance, stablecoins have emerged as a pivotal innovation, bridging the gap between traditional financial systems and the burgeoning world of cryptocurrencies. Stablecoins, designed to maintain a stable value by being pegged to a fiat currency or a basket of assets, offer a more stable alternative to the volatile nature of cryptocurrencies like Bitcoin. While the majority of stablecoins in usage are US dollar denominated, there is a growing need for euro-denominated stablecoins to gain traction in Europe. More importantly, the US is about to pass legislation that will codify stablecoins as an integral part of everyday finance, likely leading to rapid growth in stablecoin adoption. In this regard, this article explores the urgency for Europe to accelerate the regulation and growth of euro-denominated stablecoins, highlighting the potential benefits, challenges, and the critical role of regulatory frameworks.
As of now, the stablecoin market is predominantly dominated by US dollar-pegged stablecoins such as Tether (USDT) and USD Coin (USDC), which account for about 99% of the total market capitalization 1. Euro-denominated stablecoins, while present, hold a significantly smaller share of the market. The two largest euro-denominated stablecoins, EUR Tether and Stasis Euro, together account for about half of the total euro stablecoin market, which itself is valued at approximately €500 million 1. This disparity underscores the need for a more robust presence of euro-denominated stablecoins to ensure financial stability and sovereignty within the European Union. Left unchecked, the growth of blockchain finance in Europe would go hand in hand with dollar dominance in these areas, gradually spreading dollarisation in European finance with negative consequences.
The Importance of Euro-Denominated Stablecoins
Therefore, we identify an urgent need to pre-empt this outcome by promoting euro-denominated stablecoins, largely considering three purposes: financial sovereignty and monetary autonomy; financial development; and support for local innovation.
Financial Sovereignty and Stability:
The dominance of US dollar-pegged stablecoins poses a risk to the financial sovereignty of the Eurozone. By promoting euro-denominated stablecoins, Europe can reduce its dependency on the US dollar and enhance the stability of its financial system. In a benign scenario, this simply limits dollarisation and therefore preserves the healthy functioning of monetary transmission. More importantly, this would also preserve monetary autonomy in scenarios where geopolitical tensions impact the availability and stability of dollar-pegged assets, and therefore is also a national security prerogative.Financial Development:
As blockchain evolves across payments and capital markets, the need for a blockchain-based local currency instrument should rise if Europe wants to fully capture the benefits of new technology. For example, euro-denominated stablecoins can significantly streamline cross-border transactions within the Eurozone. They offer a faster, cheaper, and more efficient alternative to traditional banking systems, which are often burdened by high fees and slow processing times. This can be particularly beneficial for businesses and individuals engaged in international trade and remittances. Similarly, as capital markets tokenise, the benefits of speed and cost would only accrue to the same degree if euro-denominated assets can transact fully in Euros. USD-based stablecoin dominance is a hindrance to growth in this area.Promoting Innovation and Competitiveness:
By fostering the growth of euro-denominated stablecoins, Europe can facilitate innovation in the local digital finance space. This can attract fintech companies and startups to the region, driving innovation and competitiveness across all areas of finance as well as spillover effects into adjacent industries. This requires a critical mass, i.e. a market at scale where experimentation with technology and business models can occur. Here too, widespread usage of euro-denominated stablecoins is imperative.
Learning from the US Experience
Are there any risks to increased stablecoin usage. A recent study by the Bank for International Settlements (BIS) examined the impact of US dollar-denominated stablecoins on financial markets. The study found that flows into and out of US stablecoins had a measurable, though modest, effect on short-term Treasury yields, estimated at 2 to 6 basis points (bps). This suggests that as stablecoins scale, they can influence liquidity and pricing in sovereign debt markets. In Europe, the initial effects of euro-denominated stablecoins on the European government bond market are likely to be smaller given the market’s earlier stage. In a monetary union, every additional channel for cross-border deepening helps improve the functioning of the monetary zone. Hence, over time, a well-regulated and liquid stablecoin ecosystem could contribute to deepening the monetary union by improving capital mobility, harmonizing payment infrastructure, and offering new tools for monetary transmission.
Regulatory Framework: The Markets in Crypto-Assets Regulation (MiCAR)
The European Union has already taken significant steps towards regulating the crypto-asset market with the introduction of the Markets in Crypto-Assets Regulation (MiCAR). MiCAR aims to create a harmonized legal framework for crypto-assets across the EU, providing clarity and stability for market participants 2. Under MiCAR, stablecoins are classified into two categories: e-money tokens (EMTs) and asset-referenced tokens (ARTs). EMTs are pegged to a single fiat currency, while ARTs derive their value from a basket of assets 3.
MiCAR imposes stringent requirements on stablecoin issuers, including maintaining sufficient reserves, adhering to transparency standards, and obtaining the necessary licenses 2. These regulations are designed to protect consumers, ensure financial stability, and foster innovation within the crypto-asset market. As the implementation of MiCAR progresses, there remain concerns about regulatory clarity and the need for timely action to address gaps during the transitional period. Above all, European policymakers should continue to signal to the market that MiCAR marks the beginning of a sustained effort to foster home-grown financial solutions in the blockchain space.
The Urgency for Accelerated Regulation
Mitigating Risks:
The imminent bout of rapid growth of the USD stablecoin market, coupled with the potential for financial instability, underscores the need for immediate regulatory action. Stablecoins, despite their name, are not immune to risks such as reserve outflows and digital runs, which can lead to market disruptions – doubly so if there is a currency exchange dimension. Therefore, accelerating the implementation of Eurozone regulatory frameworks can help mitigate these risks and ensure a stable and secure market environment.
Enhancing Market Confidence:
Clear and comprehensive regulations can enhance market confidence, attracting more participants to the euro-denominated stablecoin market. This can lead to increased liquidity, reduced volatility, and greater adoption of stablecoins for everyday transactions. Regulatory clarity can also encourage traditional financial institutions to engage with stablecoins, further integrating them into the mainstream financial system.
Addressing Competitive Pressures:
The global stablecoin market is highly competitive, with regions like the United States and Asia making significant strides in their regulatory frameworks. To remain competitive, Europe must accelerate its regulatory efforts and create a conducive environment for the growth of euro-denominated stablecoins. This can prevent the outflow of liquidity to other regions and ensure that Europe can take part in digital financial innovation.
