Authors: Philipp Sandner, Agata Ferreira, Jonas Gross, Maximilian Forster, Serkan Katilmis
Circle launched the US dollar stablecoin USDC. The market capitalization of USDC has grown to a significant size of more than $50B. As of today, there is no euro stablecoin of a similar size. Now, Circle has announced plans to launch a euro stablecoin, starting June 30, 2022, based on Ethereum. With such a euro stablecoin, point-to-point euro transfers across the world will be possible as it is the case with the US dollar already. The benefit of stablecoins for cross-border payments is clear: close-to-zero transaction costs and transaction settlement in near real time. Legacy financial systems struggle to achieve this.
Instead of the European Union (EU) as the intuitive choice, Circle has chosen to issue its euro stablecoin through a US bank. This means that the EU’s regulation framework on crypto assets (so called MiCA) might not apply automatically as soon as it is in place. Even though unlikely, Circle could decide to ignore MiCA and not operate in the EU. This would mean that EUROC would not be offered to the public in the EU, by EU-based exchanges, EU-based banks and EU-based custodians. In such a case, the euro stablecoin could nevertheless be used in Switzerland, UK, Singapore — all financial hubs outside the EU. It can also be used for cross-border payments in the context of import, export, and trade finance businesses — even by European companies when structured adequately.
It is beneficial to have a euro stablecoin. But does the MiCA regulation work as intended, if global users can operate around it? Or could MiCA hamper innovation in the EU while important innovations develop outside the EU? Why do EU companies have problems launching significant stablecoins? It could be a “strange” scenario — not unlikely though — to have a euro stablecoin issued from the US for global usage but not being provided to EU users nor traded in the EU. In any case, we will soon see how this project unfolds. According to Circle, after June 30, 2022, the euro stablecoin will be supported by some crypto exchanges (e.g. Binance, FTX, Huobi), by some DeFi protocols (e.g. Compound, Curve, Uniswap) and by some custodians (e.g. Anchorage, Fireblocks).
Last week, Circle announced the launch of a euro stablecoin. Circle is part of the consortium behind USDC, the 2nd largest US dollar stablecoin. Stablecoins have been on the rise for several years. Their current total market capitalization is $154B. Stablecoins that use the US dollar as the underlying reference currency have a market share of >95%, while the euro does not play any significant role with a market share as a stablecoin reference currency of <1%. So, if the total market capitalization of stablecoins grows year by year — as it currently does — we can expect the amount of “tokenized US dollars” significantly increasing, while the amount of “tokenized euros” staying at relatively low levels, close-to-zero.
This expectation many people had in mind for 2–3 years might now change since Circle launches a euro stablecoin at the end of June 2022. This token will be called EUROC, an abbreviation for “Euro Coin”. Both the date of launching a euro stablecoin and the way it is set up came as a surprise. Since there are a number of reasons why there have not been any significant euro stablecoins so far, it comes as a surprise that Circle is now launching such a project — as early as June 30, 2022. See Figure 1 which seeks to reflect on the decision to launch a euro stablecoin. According to Circle, after June 30, 2022, the euro stablecoin will be supported by some crypto exchanges, by some DeFi protocols (e.g. Compound, Curve, Uniswap) and by some custodians.
Reasons why there have not been significant euro stablecoins so far
Negative interest rates make issuing a fiat-backed euro stablecoin unprofitable
There are a number of reasons why a significant euro stablecoin does not exist: Primarily, there have been negative interest rates in Europe for years — a result of the unprecedented expansionary monetary policy by the European Central Bank (ECB) that yielded to a strong decline in the remuneration of bank deposits and negative yield for government bonds. When acquiring a stablecoin, a user pays the issuer money (bank deposits) and the issuer provides the corresponding stablecoin in return for the user. Stablecoins are non-interest bearing. As a result, the stablecoin’s issuer either deposits the money received from the user in a bank account or invests them in short-term government bonds. However, the issuer does not require the user to also pay negative interest rates to compensate for the issuer’s loss resulting from such negative interest rates. Therefore, the issuers of euro stablecoins in negative interest rate environments operate at a loss. This is different with US dollar stablecoins as interest rates for the US dollar never went negative but rather remained always slightly positive.
Once the market capitalization of the euro stablecoin increases in size, the losses are also increasing such that it does not make sense from a business perspective for the issuer to operate such a stablecoin. Once the negative interest rates on bank deposits and government bonds become positive, issuing a stablecoin can well be a profitable business. This is precisely the situation that we currently observe in Europe. Recently, we have seen strong increases in interest rates on government bonds and the ECB recently announced to increase interest rates in July for the first time since 2011. Thus, Circle’s bet on increasing interest rates might play out well.
High regulatory hurdles according to MiCA regulation
Another reason why there have not been euro stablecoin so far: The upcoming Markets in Crypto Assets (MiCA) regulation will introduce a high regulatory burden. Currently, the regulatory framework for stablecoins in the EU is fragmented and uncertain. The EU Commission has published the MiCA proposal in September 2020 and it has been going through the gears of the EU legislative process ever since. MiCA will most likely come into force at the end of 2023. Under MiCA, stablecoins pegged to fiat currency will belong to a category of so-called E-Money Tokens (EMT) and — in case they are of significant sizes — so-called Significant E-Money Tokens (SEMT). Regulatory requirements and obligations imposed on issuers of such EMT/SEMT tokens are significantly higher than, for example, in the USA. So, where could a stablecoin issuer operate its business instead, to avoid such regulatory burden? Most likely in the USA where the regulatory hurdles are still lower. This is what happened in previous years. Consequently, there are no other significant euro stablecoin projects except Circle’s newly announced euro stablecoin.
Reducing volatility of crypto assets through stablecoins
In the past, stablecoins such as Tether/USDT were launched to provide a tool for investors to move out from volatile assets towards stable assets. Given the volatility of crypto assets, stablecoins, therefore, provided this benefit for investors. US dollar stablecoins were launched first to deliver this benefit. Now, as this “problem” for crypto investors has been solved, there was no need for further stablecoins referenced to other fiat currencies, such as the euro. The same logic applies to the usage of the US dollar in the Decentralized Finance (DeFi) ecosystem. Consequently, no other stablecoins than US dollar denominated stablecoins grew to significant sizes. Or, in other words, from the perspective of crypto exchanges and DeFi protocols, a euro stablecoin is not a “must”, rather a “nice to have”.
Demand for euro stablecoins (as one version of the digital euro besides CBDCs)
Nevertheless, the euro is among the three largest currencies in the world and there are increasing needs for euro stablecoins, because a “digital euro” on blockchain systems that enables the use of smart contracts offers substantial benefits. These benefits range from international use cases, as shown below, such as reducing costs for cross-border payments and increasing financial inclusion, to rather national use cases around automation, programmable payments, and innovative business models enabled by streaming payment applications. Industry players across the entire Europe have expressed their interest in digital euro solutions for years. The ECB envisions a central bank digital currency (CBDC) as a potential form of the digital euro but such a solution cannot be expected before 2026 or 2028 — and will very likely not be based on blockchain technology. Therefore, if businesses from across finance or industrial corporations throughout the Euro area demand the digital euro in the meantime and on blockchain basis, the ECB cannot help. A euro stablecoin would be the solution. This is nothing new as this solution has been mentioned for years.
Maybe Circle saw this coming and — as interest rates are currently turning positive — announced their plans to launch a euro stablecoin.
Setup of Circle’s euro stablecoin
Issuance from the US
From the documents published so far, we do not know all the details about EUROC. But based on current information, it is possible to put together a puzzle of multiple pieces on how Circle’s euro stablecoin should work (see Figure 1).
The most interesting aspect is that Circle’s euro stablecoin will be issued from the US, not from the EU (see Figure 1). To be crystal clear: A euro stablecoin emerges that is not issued from an institution or a company based in an European country but in the US. Circle uses the bank Silvergate for this as it has been listed as the initial custodian for the euro stablecoin. In a recent article, it is stated: “Asked whether the stablecoin will be compliant with future European regulation once MiCA (Markets in Crypto-Assets) framework is approved by the EU, a Circle spokesperson responded, saying that EUROC will be initially issued ‘within the US regulatory perimeter, with euro-denominated reserves held by US-regulated financial institutions.’” With the high hurdles of MiCA already known after more than 2 years of institutional repercussions throughout the European bureaucracy and with Circle already having successfully issued a US dollar stablecoin in the US, it is easy to understand that Circle chooses the US as “home destination” of its euro stablecoin, even though it feels counter intuitive. It is not. Rather, it is understandable.
In the above referenced article, it is also stated that once MiCA is in force, it is possible that Circle’s issuance of its euro stablecoin may constitute a regulated activity within the EU and it could fall within the perimeter. Recall that EU regulation generally applies if a provider (e.g. a crypto exchange) or the recipient of the regulated service is located within the EU. This is very interesting as Circle then has two possibilities (see Figure 1): (i) it can apply for all required licenses asked for by MiCA or can partner with companies in the EU that have respective licenses. As a result, Circle could offer its euro stablecoin also to EU businesses and individuals. Alternatively, (ii) Circle can also decide to not get licensed according to MiCA in the EU. Then it would be required to offer its euro stablecoin only outside of the EU, to non-EU based businesses and individuals.
While this might sound odd on the first sight, there are still huge business opportunities for an issuer of euro stablecoin that issues the euro stablecoin from the US to non-EU companies because it might have decided to avoid MiCA. This could be possible. We show multiple such situations below.
Ethereum as technical platform
While Circle’s US dollar stablecoin USDC is operating on quite a number of smart contract platforms at the same time (e.g. Ethereum, Binance, Solana, Algorand), the company initially launched its euro stablecoin just on Ethereum. The smart contract has apparently already deployed for the project’s launch. So, it is getting real.
E-Money license in the UK
While Circle’s US dollar stablecoin USDC is operating on quite a number of smart contract platforms at the same time (e.g. Ethereum, Binance, Solana, Algorand), the company initially launched its euro stablecoin just on Ethereum. The smart contract has apparently already deployed for the project’s launch. So, it is getting real. The number of euros minted is still quite low, but once the token is listed on exchanges, the circulating supply should increase.
But for what would it be needed?
Non-EU financial centers
There are many financial centers around the world and the US dollar is the dominating currency in the world. But still, the Euro is also significantly important — also outside the euro area. Think of London, Singapore, Zurich — these financial centers are not the EU countries, so they could use the Circle’s euro stablecoin, without the need to comply with the MiCA regulation. Another proof that the euro has importance on an international level comes from a study by the ECB revealing that the Euro is, after the US dollar, the currency number two, used for foreign exchange reserves, debt and international loans. Further, the International Monetary Fund (IMF) provides a double digit percentage share of the euro with its Special Drawing Rights (SDR). This also proves the euro is a significant international currency, but significantly less important than the US dollar.
Such financial centers — by nature — do international business, which involves cross-border payments to dozens of different countries. With one and the same technology, Circle could offer the US dollar stablecoin and the euro stablecoin to these financial centers (and their clients). As they operate outside the EU, MiCA will not apply. If MiCA hinders euro stablecoin adoption within the EU countries, these financial centers could still use Circle’s euro stablecoin for cross-border transactions with other non-EU countries: again, real-time payments for many payment corridors at close-to-zero transaction costs.
Listing on worldwide crypto exchanges
Stablecoins are becoming listed on crypto exchanges. Due to the high volatility of crypto assets, the goal of crypto exchanges was to enable their users to store value in a non-volatile fiat-denominated asset. This was the rationale for inventing and launching USDT/Tether.
Without a MiCA license, Circle could not, of course, serve the EU users and it could not list its euro stablecoin on crypto exchanges that operate in the EU. But issuing EUROC from the US, Circle could engage with non-EU crypto exchanges and list its euro stablecoin in the US and other non-EU markets. This could be crypto exchanges such as Bitfinex operating from Hong Kong. In case they would have MiCA licenses, they could, of course, also list the euro stablecoin with MiCA-affected exchanges such as Bitstamp from Luxembourg.
We will see soon how this project unfolds when the EUROC is officially launched. According to Circle, after June 30, 2022, the euro stablecoin will be supported by some crypto exchanges (e.g. Binance, Bitstamp, FTX, Huobi), by some DeFi protocols (e.g. Compound, Curve, Uniswap) and by some custodians (e.g. Anchorage, Fireblocks). Bitstamp will be interesting to watch, since it has a EU-footprint so once MiCA will be in force, EUROC must comply with MiCA if it is to be offered to EU citizens or traded in the EU. An alternative is, to not comply with MiCA and, consequently, not offer it to EU citizens and not operate in the EU.
B2B payments within and across multinational corporations
Multinational enterprises comprise dozens — or even hundreds — of legal entities puzzled together. Of course, they have their headquarters in a specific country. But still, their legal entities reach out to and operate in dozens of other countries. So, let’s make an example and illustrate this with a European company. We could use Daimler, Bosch, Siemens from Germany — or Peugeot, Axa from France.
Let’s choose Daimler, an international car manufacturer selling its premium cars worldwide with its headquarters in Stuttgart in Southern Germany. Daimler has many subsidiaries in the entire world, e.g. in the USA or in South Africa. As a German corporation, Daimler does its accounting ultimately in euro, even though other currencies are used as well. For such circumstances, where cross-border payments occur regularly, it would be beneficial to have a more efficient payment mechanism for cross-border payments than the one we have today. When you transfer money from Germany to non-EU countries, such as Switzerland, it sometimes takes days and, additionally, significant transaction fees arise. With a euro stablecoin, such transfers would happen instantly and at close-to-zero-transactions costs. Even if Circle charges some fees for transacting with EUROC, the transaction costs will most likely still be lower than for most international currency corridors today. The cross-border payment use cases should be very interesting from Circle’s perspective. These use cases do not only include business use cases, but also cross-border transfers for individuals. Lower transaction costs could in the end also drive financial inclusion, which is one of the key goals of the G20.
Even in case Daimler in Germany could not pay with Circle’s euro stablecoin due to lack of MiCA licenses, it could decide to set up a payments subsidiary in a non-EU country just for the purpose of bundling all payments. This could be a Swiss entity, for example. So, just 200km from its headquarters since this is the distance between Zurich in Switzerland and Stuttgart in Germany. Since Switzerland is not part of the EU, MiCA does not and will not apply there. Daimler Switzerland could, therefore, consolidate and manage all payments with Circle’s euro stablecoin — back and forth from dozens of countries in the entire world. Even more so, in case US dollar-denominated payments are desired, Daimler Switzerland could do the same with Circle’s US dollar stablecoin.
To illustrate this: For its import, export and other activities, Daimler South Africa could engage in real-time payments at close-to-zero transaction costs with Daimler Switzerland in both the euro and the US dollar with the same payment interface and technological basis, the Ethereum blockchain and a wallet infrastructure. The same could happen with Daimler Japan, Daimler Argentina etc. — Daimler Switzerland bundles all these payments with the stablecoins and settles from time to time with the headquarters in Germany, which might not be able to deal with stablecoins, such that netting could take place with legacy IBAN accounts.
Choosing European or US solutions — but one technical interface
There are a number of countries that might prefer European solutions over US-driven solutions. Reasons could, for example, range from economic to political factors. While Circle issuing its euro stablecoin from the US has to comply with US rules, it can be interesting for people and companies in a number of countries throughout the world to choose between transactions in US dollar on in euro. In any case, the technology is the same. Such users have one technology in place and can choose to use the US dollar or the euro for their transactions. Because it is one and the same technology, they could also easily replace one by the other. There are a number of more potential examples from the trade finance domain, from the area of financial inclusion, and from the cross-border payments domain, where both Circle’s products can be beneficial.
One of the key benefits of stablecoins are point-to-point transactions across the globe at very low transaction costs and with an instant settlement. Today, legacy financial systems struggle to achieve this.
The stablecoin space is clearly dominated by the US dollar. Circle has now announced plans to launch a euro stablecoin. It has chosen to issue its euro stablecoin through a US bank, instead of the EU as the intuitive choice.
Circle can decide whether or not to comply with MiCA rules since MiCA can create significant hurdles for companies. Regardless of MiCA, Circle’s euro stablecoin can still be used in Switzerland, UK, Singapore — all financial hubs outside the EU. It can also be used for cross-border payments in the context of import, export, and trade finance businesses — even by European companies when structured adequately.
We need to see where this stablecoin will be made available, to which groups of users, and in which countries; but it could be a “strange” scenario — technically possible — to have a euro stablecoin issued from the US for global usage but not being provided to EU users.
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About the authors
Prof. Dr. Philipp Sandner has founded the Frankfurt School Blockchain Center (FSBC). He has been a member of the FinTech Council and the Digital Finance Forum of the Federal Ministry of Finance in Germany. The expertise of Prof. Sandner includes blockchain technology in general, crypto assets such as Bitcoin and Ethereum, decentralized finance (DeFi), the digital euro, tokenization of assets and digital identity. You can contact him via mail (firstname.lastname@example.org) via LinkedIn or follow him on Twitter (@philippsandner).
Prof. Dr. Agata Ferreira is the Chief Legal Officer at Status.im, expert at the EU Blockchain Observatory and Forum, scholar, assistant professor and academic and a published author in the field of law and technology with a particular focus on decentralized technologies and Web 3.0.
Jonas Gross is Chairman of the Digital Euro Association (DEA) and Head of Digital Assets and Currencies at etonec. Further, Jonas is co-host of the German podcast “Bitcoin, Fiat, & Rock’n’ Roll” and member of the expert panel of the European Blockchain Observatory and Forum. In Summer 2022, Jonas finished his PhD thesis in Economics about digital currencies at the University of Bayreuth, Germany. His main research focuses on central bank digital currencies, stablecoins, cryptocurrencies, and monetary policy. You can contact him via mail (email@example.com) via LinkedIn or follow him on Twitter.
Serkan Katilmis is tech-entrepreneur and investor, who has more than 20 years of experience in top-tier management consulting. As CEO of CashOnLedger, he promotes the Euro on blockchain systems such that smart contracts can be used in an industrial setting or in B2B contexts. Prior to that, Serkan was working for leading organizations Goldman Sachs, Accenture and PwC as an executive. He holds an MBA from Duke University and completed several executive strategy programs at INSEAD. You can contact him via Linkedin.
Maximilian Forster focuses on business development working for CashOnLedger. He is also in close connection with the blockchain ecosystem being a co-founder of the Blockchain Bayern, member of INATBA and member of the Blockchain Taskforce at Bitkom; previously, he helped to build up the DLT and blockchain service offering of KPMG and Accenture and worked on the blockchain investment strategy for Picus Capital. He is also in close connection with financial organizations and industrial companies: e.g., he has contributed to the Goethe University Frankfurt’s “Digital Banking Practical Handbook” and DHL’s “Blockchain in Logistics” publication. You can contact him via Linkedin.