The recently approved Markets in Crypto Assets (MiCA) regulation is expected to provide much needed regulatory clarity and serve as a standard for global crypto regulations. But besides spurring a new wave of development in the industry, perhaps one of the most promising results of the new framework is that it will finally make a European stablecoin possible – something that has been long overdue.
Fiat-backed stablecoins are mostly a one player game right now with U.S. dollar-denominated options taken as the default in most crypto transactions. But this preference for the greenback no longer reflects the realities of a multipolar global economy.
Kevin de Patoul is the CEO and co-founder of Keyrock, a digital asset market maker.
There are growing concerns around the United States economy, which was rocked by pandemic-led shutdowns and now inflation. Likewise, international efforts such as the launch of a BRICS digital currency are looking to challenge dollar dominance. (BRICS stands for Brazil, Russia, India, China and South Africa.)
In this context, a sound alternative in the form of euro-backed stablecoins for crypto markets is more than welcome. It would inject much needed competition in today's crypto markets.
Now is the time
But why hasn’t a viable euro stablecoin happened already? So far, the absence of a widely adopted euro-backed stablecoin has been due to two factors: negative interest rates and regulatory burdens.
Negative interest rates in the eurozone have made it difficult for a fiat-backed stablecoin to emerge given that traders often what to earn yield for taking on risk. And stablecoins, no matter how stable, do carry risks.
However, the situation have changed. The European Central Bank (ECB) ended this 11-year monetary policy experiment in 2022 as it prepared to face the economic impact of the Ukraine war.
In terms of regulatory burdens, MiCA classifies stablecoins as e-money tokens (EMT) or significant e-money tokens (SEMT) if they become large enough. This implies that organizations need to be fully registered and compliant when MiCA comes into force in 2024 in order to issue a euro-backed stablecoin and offer it to European counterparties.
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For a long time, this might have been a hurdle compared to other, more lax, regulatory environments. However, recent crypto crackdowns in the U.S. have shown that, while MiCA might be more strict on the issuance of stablecoins, it has the merit of being clear and providing stability.
An organization launching a stablecoin today might find it relatively more attractive to work under the MiCA framework. Clear rules and guidelines are preferable to the arbitrary regulation by enforcement seen in the United States.
This has important downstream implications for companies and individuals. For example, finding suitable banking partners was very difficult a few years ago. Now it would be completely feasible, especially for a player that’s fully compliant with MiCA.
Why euro stablecoins are necessary
But a euro-based stablecoin would not just be nice to have, it’s something that is essential to the future health of European crypto markets. Moreover, the euro is an equally important currency in the worldwide economy. It’s not only used in the so-called eurozone but also massively adopted in international trade.
However, European startups have been in a position where they implicitly rely on the stability of the U.S. economy. Having a digital euro provides all the same benefits of dollar-pegged stablecoins (global reach, cheap fees, transaction finality, etc.), without the foreign exchange exposure. Lessening counterparty risk would ultimately benefit the market as a whole.
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A euro-backed stablecoin also provides regulatory diversification, so to speak. It would help broaden access to a stable region that is not subject to the whims of overzealous U.S. politicians and regulators.
What happens after launch?
The emergence of one or many euro-backed stablecoins is only a matter of time. What we can expect after that is that the balance between euro and dollar stablecoins in circulation will be similar to the proportion of euros and dollars in the regular fiat economy. This means that there will be far fewer euro stablecoins exchanging hands, due to the immense demand for dollars.
However, if the U.S. manages to completely rule itself out of the growth of digital assets markets (for lack of regulatory clarity), it will make the E.U. a much more attractive jurisdiction. That would create tremendous growth for euro-denominated stablecoins.
The U.S. Securities and Exchange Commission's (SEC) increasingly hostile stance against crypto is offering the European Union a chance to build a significant edge in crypto. And with no consensus in sight for crypto regulation in the United States, the ongoing challenge to the U.S. dollar’s dominance in the real economy could soon extend to the world of digital assets.