Circle’s New Euro Stablecoin: Issued from the US and Used Outside the EU?

Introduction

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.

Figure 1: Reflecting on the decision to launch a euro stablecoin and specifying its setup. For simplicity, this figure considers MiCA, even though it is not yet in place.

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.

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.

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).

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.

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.

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.

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.

Conclusion

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.

Remarks

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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 (m@philippsandner.de) via LinkedIn or follow him on Twitter (@philippsandner).

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Jonas Gross

Jonas Gross

Jonas Gross is Chairman of the Digital Euro Association (DEA) and Head of Digital Assets and Currencies at etonec. Further, Jonas holds a PhD in Economics.