Europe’s new stablecoin

An Italian, a Finn, and a Dutchman walk into a bar. 

No, it’s not the start of a joke (that we know of?), but rather what just happened this week after that trio and 34 other European banks joined forces to build a euro stablecoin.

By way of refresh, stablecoins are a type of cryptocurrency that remain pegged to an asset, usually a fiat currency like the USD or euro. So rather than (say) making you extremely rich or poor like Bitcoin might do depending on your timing, stablecoins promise… stability! Got one USD stablecoin? It’ll be worth $1 today, tomorrow, Toyota. 

Then… what’s the point?

They’re so hot right now since the US passed a law to normalise stablecoins as a method of payment, given they’re low-cost, ~instant, and 24/7. That’s why the original Tether stablecoin (USDT, from 2014) often records the biggest daily trading volume of any crypto.

There are two broad types of stablecoin:

1. Algorithmic stablecoins maintain their peg via an algorithm that creates or destroys tokens as needed, whereas…

2. Fully reserved stablecoins are backed by actual reserves so users can redeem tokens for underlying assets. 

Unsurprisingly, that second method is the most popular and trusted, including for the reason we’re briefing you on all this: the proposed new euro-stablecoin, Qivalis, would be backed by 37 commercial banks across Europe, fully reserved with euros.

Why? Check out these numbers…

• The global stablecoin market is already worth ~$318B (and growing), 

• 99% of that market is pegged to the US dollar

• Two US-born firms run 80%: Tether (now in El Salvador) and Circle Internet, and

• US firms even run two-thirds of the much-smaller euro-stablecoin market!

So Qivalis wants to fill that euro-shaped gap in the market with a local solution, offering two big if obvious benefits for Europe:

• First, it helps boost the euro as a method for digital payment, and

• Second, it decreases the continent’s reliance on the US.

Or to put it another way, as the tokenised economy grows, more countries will want their own rails to get a slice.

But the banks themselves will get benefits too: i) they’ll earn sweet fees from cross-border payments, ii) their corporate and institutional clients will get early access; and iii) they’ll all get early access to whatever on-chain infrastructure follows.

So… why isn’t everyone doing this already? Fans might put hands on hips and give a sassy “exactly”, but ECB chief Christine Lagarde herself has just flagged the risks in her recent address at the LatAm Economic Forum in Spain:

First, there’s financial stability: this whole ecosystem tends not to be as regulated as banks, meaning their reserve structures aren’t always as strong. And that means a run on a stablecoin could get messy, with potential knock-on effects for the “real” economy.

And second, there’s monetary policy transmission: the large-scale adoption of stablecoins could make it harder for the ECB to steward the eurozone via interest rate decisions (though fans would list this decentralisation as a plus). 

So sure, Lagarde’s warnings are valid. But right now — in this world of ours — the riskiest move is sometimes standing still.