Curtailing the Spread of Stablecoins in Europe: A Concern?

Curtailing the Spread of Stablecoins in Europe: A Concern?

The world of digital currencies is expanding, with stablecoins taking centre stage in the European Union. These digital assets, designed to provide stability, are expected to see a significant increase in supply, according to market analysts. By the end of 2028, the market could grow from its current $230 billion to a staggering $2 trillion.

However, this growth comes with a host of concerns and risks.

Risks and Concerns

Monetary Sovereignty and Policy Control

The widespread use of U.S. dollar-backed stablecoins could potentially weaken the European Central Bank's (ECB) control over the eurozone economy. This could lead to a "dollarized" economy where U.S. monetary policies might influence European financial conditions more directly. Jürgen Schaaf, an ECB expert, has voiced this concern, warning that such a scenario could limit the ECB's control over monetary conditions, making it harder to implement effective monetary policies.

Financial Stability Risks

The interconnected nature of stablecoins means that a sudden collapse of a major stablecoin could spread shockwaves through the financial system. Additionally, interest-bearing stablecoins could divert deposits from traditional banks, reducing their ability to extend credit and perform their economic functions.

Regulatory Divergence and Compliance

The EU's Markets in Crypto-assets (MiCA) Regulation requires stablecoin issuers to hold significant reserves in insured cash deposits. This could be challenging and risky for issuers like Tether. Furthermore, the lack of transparency in stablecoins makes them attractive for illicit transactions, which could undermine financial integrity.

Economic Implications

The dominance of U.S. dollar-linked stablecoins could further strengthen the U.S. dollar's position in global transactions, potentially reducing the euro's influence and increasing the eurozone's financing costs.

In response to these concerns, European banks are working on projects involving euro-denominated stablecoins, and the digital euro, proposed by Schaaf, is seen as a robust defense line for European currency sovereignty against the US.

The startup AllUnity, which recently received an e-money license from BaFin, has brought the first regulated Euro stablecoin, EURAU, to the market in Germany. Schaaf suggests more support for properly regulated, euro-denominated stablecoins as a way to address the current gap in the market.

Despite these challenges, the growth of stablecoins in Europe is a trend that is unlikely to slow down. As the industry continues to evolve, it will be crucial for regulators to strike a balance between fostering innovation and ensuring financial stability and integrity.

[1] Paweł Tokarski, German Institute for International and Security Affairs [2] Bank for International Settlements (BIS) [3] Jan Schulte, dreimaldrei journalists' bureau, Tagesspiegel Background Sustainable Finance, ZEIT, WirtschaftsWoche [4] Jürgen Schaaf, ECB [5] The proposed MiCA and the US's Stable Act are expected to lead to an increase in the supply of stablecoins, with market analysts predicting a growth from $230 billion in 2025 to $2 trillion by the end of 2028. [6] Schaaf suggests more support for properly regulated, euro-denominated stablecoins as a way to address the current gap in the market. [7] Around 99% of the total market capitalization of stablecoins comes from US dollar-based stablecoins. [8] The digital euro, according to Schaaf, could potentially reduce the industry's skepticism towards the project. [9] European banks are working on projects involving euro-denominated stablecoins. [10] Some stablecoin platforms offer interest on balances, generating a return similar to a savings account but with higher risks. [11] Many stablecoins have shown significant deviations from their face value, according to Schaaf. [12] Jan Schulte is a freelance journalist and co-founder of the dreimaldrei journalists' bureau, writing for publications such as Tagesspiegel Background Sustainable Finance, ZEIT, and WirtschaftsWoche. [13] The startup AllUnity received an e-money license from BaFin in July of this year. [14] Schaaf warns that the interconnection between traditional finance and stablecoins could pose risks to financial stability. [15] Paweł Tokarski, from the German Institute for International and Security Affairs, warns that the rapid development of private, dollar-pegged currencies in the US could pose risks to European countries, particularly heavily indebted ones in the eurozone. [16] Schaaf proposes the digital euro as a complementary project to private sector innovations, serving as a robust defense line for European currency sovereignty against the US. [17] The ECB's Jürgen Schaaf wrote a blog post on the central bank's website expressing concerns about stablecoins. [18] A disorderly collapse of stablecoins could affect the entire financial system, according to Schaaf.

1. With the predicted growth of stablecoins in the European Union from $230 billion to a potential $2 trillion by 2028, there are concerns about technology's role in reshaping banking, finance, and investing, especially the implications for monetary sovereignty, financial stability, and economic stability.
2. In response to the risks posed by U.S. dollar-backed stablecoins and the need for properly regulated alternatives, the digital euro is proposed as a robust defense line for European currency sovereignty, and European banks are developing euro-denominated stablecoins, following the launch of the regulated Euro stablecoin, EURAU, by AllUnity.

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