Will Euro stablecoins like EUROC become mainstream?

Will Euro stablecoins like EUROC become mainstream?

Stablecoins are predominantly US dollar-pegged projects, but the euro gets its piece of the pie. Circle's EUROC (Euro Coin) announcement last week gave experts some confidence that there will be a major euro-pegged stablecoin in the near future, although it is 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 world's second largest currency, just behind the US dollar. Despite its global market share of around 19% across various indicators of international currency usage, the euro has an insignificant share of stablecoins.

While the crypto ecosystem drained capital during this bear market, dollar-pegged stablecoins managed to increase their dominance as investors sought protection during these turbulent weeks. Despite explosions like TerraUSD (UST), stablecoins are seen as a means of parking value without having to cash out in fiat currency, which often incurs fees.

To date, only a few stablecoins have been pegged to the euro, such as EURt from Tether – a sister stablecoin to the largest dollar-backed issue USDT – or EURS from Stasis. Far from the scale of dollar-pegged stablecoins, EURt has a market cap of around $218.4 million and EURS's 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 share of the euro in the crypto markets is “extremely low” at 0.2%. The Eurozone central bank acknowledges that “stablecoins pegged to the euro have started to gain popularity even though the market is still in its infancy,” but warns that “stablecoins should not be viewed as a new class of safe assets, but rather as a less volatile but risky cryptoasset.”

Still, Patrick Hansen, EU policy expert and crypto venture advisor at Presight Capital, believes demand is increasing for a euro-denominated stablecoin, accounting 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 improve a variety of interesting use cases for European investors and businesses: from more efficient entry/exit to 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 game-changer for European investors as they face FX risks against the dollar. So far in 2022, the euro zone currency has lost 11% of its value against the dollar, and some analysts predict the two currencies will reach parity later this year.

At the moment, euro-based stablecoins are less liquid and “tend to be sold similarly to other risky assets, rather than behaving like a vehicle in digital transactions and trading,” according to ECB research. At the same time, the institution admits that a euro stablecoin could support the currency's international profile.

Normalization of monetary policy may accelerate adoption

A crucial question for an issuer of a euro-based stablecoin lies squarely within the purview of the ECB. With its deposit rate of -0.5%, the European Central Bank makes it difficult to maintain a euro-pegged stablecoin with full reserves, as issuers have to pay negative interest on bank deposits.

“Negative interest rates on bank deposits are among the key barriers to the development and growth of reserve-backed euro-denominated stablecoins,” admitted Hansen.

In one tweet In April, before Circle's announcement, Hansen calculated that the company would have to pay €250 million in interest on its euro reserves locked at the bank if it created a euro-pegged stablecoin with a market cap of €50 billion.

On EUROC's website, Circle addresses the issue: "Circle assumes interest rate risk for the Euro Coin reserves, just as 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, leaving negative territory and making it easier to hold large amounts of euro reserves at the bank.

“This will undoubtedly be a crucial change and requirement for Euro stablecoin issuers,” predicts Hansen.

Will regulation hurt or benefit Euro-pegged stablecoins?

The ECB’s interest rate hikes come at a crossroads for European regulation towards crypto. The European Union is close to reaching an agreement on Markets for Crypto Assets (MiCA), a landmark law that will shape crypto innovation in the Old Continent.

“This will undoubtedly have a significant impact on the Euro stablecoin market and I do not expect that most Euro stablecoin issuers will be able to manage the complex MiCA requirements to the satisfaction of the EU regulator,” Hansen said, adding, however, “those that 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 you have and how it is implemented and affects companies. If it is well thought out, it allows innovation without being too restricted," said Scholz, who not only shares a name with German Chancellor Olaf Scholz but is actually his nephew.

Even the ECB, which is part of the eurozone's financial regulator, is eyeing 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,” concludes the ECB, pointing to the expected MiCA regulation and international cooperation on the regulation of cryptoassets.

And in the meantime as President Christine Lagarde said recently Lawmakers may need to work on MiCA 2.0.

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The post Will Euro stablecoins like EUROC become mainstream? is not financial advice.