EUROC: What is the perspective of the EU stablecoin?
Almost everyone is now familiar with cryptocurrencies such as Bitcoin or Ethereum. When it comes to stablecoins, however, many investors are still in the dark. Their market capitalization now amounts to a total of around 150 billion dollars. The market is currently still clearly dominated by US stablecoins. With the euro stablecoin EUROC — which, however, is not issued by the ECB — this could change soon.
This is because the demand from larger financial institutions and private investors for a regulatory-backed Euro stablecoin is high and the EUROC Issuer Circle could start issuing it soon. Find out how stablecoins are designed and which advantages and disadvantages are associated with EUROC.
Stablecoins: The stable cryptocurrency?
In contrast to other cryptocurrencies, stablecoins are not an object of return or speculation, as their price remains largely constant. Investors therefore like to use them to “park” their crypto assets with as little risk as possible or use them as a less volatile and globally available means of payment.
Stability comes from stablecoins trying to maintain a constant exchange rate to fiat currencies — in most cases by linking them 1:1 to the dollar. In addition to a Linked to fiat currencies (US dollars, euros, yen, etc.), stablecoins can also be linked to commodities (an ounce of gold, a barrel of oil, etc.) or other cryptocurrencies. Algorithmic safeguards are also possible. When demand is high, new coins are created and when demand falls, the excess supply is bought up. The law of supply and demand should mean that the value of these stablecoins does not fluctuate too much.
However, trust in algorithm-based stablecoins (and the entire crypto industry) was massively shaken in May 2022, as with Collapse of Terra/Luna many investors suffered a total loss. Terra USD (UST) was an algorithmic stablecoin. That means he has no reserves in dollars or other fiat currencies. Instead, its value should be maintained by a complex algorithm. Since the decentralized stablecoin was linked to the LUNA token, massive LUNA coins had to be mined after a sell-off in order to stabilize the VAT. As a result, the underlying algorithm collapsed, investors sold in panic and put cryptocurrencies such as Bitcoin or Ethereum under massive pressure.
In contrast, market-leading stablecoins such as Tether, USDC and Binance USD are backed by fiat currencies. Around 95% of them use the US dollar as a reference currency, while the euro, with a market share of around 0.2 percent, plays no significant role as a stablecoin reference currency.
The low stablecoin market capitalization of the euro is particularly astonishing, especially in the overall context: After all, the euro makes around 37 percent of global SWIFT payments and 20 percent of the world's foreign reserves. But thanks to the new EUROC stablecoin, that could soon change — at least at a low level.
EUROC: EU stablecoin with American roots
At the beginning of July 2022, the US fintech firm quit Circle the introduction of a Euro stablecoin (EUROC) based on the Ethereum network. Circle is part of the consortium behind USDC, the second-largest stablecoin in US dollars. However, EUROC, which was originally designed for Europe, has not only one US issuer: Circle has also decided to issue the planned Euro stablecoin via the US bank Silvergate.
According to a company report, the introduction of EUROC is aimed at “continuing Circle's successful work in promoting the smooth exchange of financial assets and bridging cryptonative and traditional financial services.” With such a euro stablecoin, uncomplicated euro transfers all over the world would be possible in the future, as is already the case with the US dollar. Companies can integrate EUROC as a payment method to make their businesses easier and more user-friendly and to speed up cash flow for B2B customers. In addition, private individuals will have a tool for lightning-fast, cross-border transfers with hardly any fees.
At the moment, however, there is the question of how European regulators will feel about EUROC and: What is the new legal framework”Markets in crypto assets” (MiCA) for Circle, which, interestingly enough, was adopted on the day of the EUROC launch.
MiCA includes a wide range of requirements, ranging from unsecured cryptocurrencies and stablecoins to crypto exchanges and crypto wallets, which are intended to promote transparency and consumer protection. However, the permanent establishment requirement for companies is critical. In future, they must be based in the EU in order to be able to issue a Euro stablecoin.
Circle can currently offer EUROC without a permit, but would have to come to terms with the regulations in two years after MiCA comes into force. A - paradoxical - solution is also conceivable in which EUROC is available to all users outside Europe, but not to Europeans themselves.
Where is the ECB's digital euro?
In view of this development driven by the USA, the question naturally arises as to when the ECB's long-awaited digital euro will finally arrive.
The digital euro is to be issued directly by the ECB as a so-called Central Bank Digital Currency (CBDC). Like EUROC, digital central bank money should offer the opportunity to make international payments faster, cheaper and more transparent. However, the digital euro could be limited to a maximum of 1.5 trillion euros — that would correspond to around 3,000 to 4,000 digital euros per inhabitant.
The ECB has been examining the possible introduction of a digital, European common currency for several years. Since October 2021, experts have been working on specific questions about possible design, technology and data protection issues in an investigation phase. It will run until October 2023, when the digital euro could be launched in 2025, but cash should only supplement and not replace it.
