Euro Stablecoin Success Paves the Way for Future Digital Forex Market

by Avramis Despotis     8月 02, 2021

The cryptocurrency market and the forex market differ greatly in size, with the former not even coming close to matching the $6 trillion-plus daily trading volume that the FX market experiences. Both the markets have co-existed separately with each having its own ardent traders. However, recent growth in Euro-backed stablecoins has prompted token issuers to think of a future, where national currencies have found their way into blockchain-based markets. At the forefront of this revolution are cryptocurrency exchanges and Decentralized Finance (DeFi) lending platforms.

What are Euro-backed stablecoins?

To understand what Euro-backed stablecoins are, you first have to understand what a stablecoin refers to. Stablecoins are a class of cryptocurrency where the token’s price is backed by a specific cryptocurrency, ETF or fiat money. The value of Fiat-backed stablecoins is based on a specific currency, which is the Euro in this case. It is held by a third party regulatory financial entity. These stablecoins can be redeemed from the issuer and traded on exchanges. Although most of the stablecoins are pegged to the USD, there are quite a number of EUR-backed stablecoins in existence as well.

The largest Euro-backed stablecoin is EURS, which combines the transparency, efficiency and immutability of blockchain technology with the stability of the Euro. Based on data from Glassnode, the circulating supply of EURS has more than doubled in 2021 to reach nearly 80 million from 30 million the year before.

EURS is issued by Stasis and is built on Ethereum’s ERC-20 token standard. It claims to be backed by Euros on a 1:1 basis. At the time of writing, EURS is valued at $1.18, with a total market cap of $104,668,397. However, this is dwarfed by the market caps of other stablecoins such as USD-backed Tether and USDC.

Recent Developments in the Market

The FX market is by far the largest financial market in the world, where traders trade over the counter. Compared to other traditional financial markets, the FX market is much more opaque with large institutions primarily determining prices. Interest in Euro-backed stablecoins took off last year as a result of institutional investors switching from traditional finance to crypto investing. Because of the significant spending by the United States government, there has been a recent “anti-dollar” narrative. As a result, the attention of investors has shifted to the Euro, the second-largest fiat currency after the USD.

Many analysts have pointed out the lagging penetration of cryptocurrency in general across Europe for the sudden growth of EURS since the beginning of 2021. A number of financial institutions in Europe have thus decided to hope on the Defi and stablecoin bandwagon. For instance, Switzerland-based Sygnum Bank launched several Defi tokens for trading, including Uniswap, Synthetic, Maker, Curve, Aragon and Aave.

Cardano’s New Stablecoin

Carano(ADA) has recently announced the launch of AgeUSD, a new type of algorithmic stablecoin that will launch on its network. The stablecoin came into existence as a result of a partnership between the Ergo Foundation, blockchain solutions provider Emurgo and Input-Output Global. It uses a new Staticoin inspired protocol design that does not rely on Collateralized Debt positions, unlike other Ethereum-based stablecoins. Stablecoins that use Collateralized Debt positions are susceptible to blockchain overloading and high volatility. The stablecoin marks the first project for both Cardano and Ergo, which further adds utility for those two tokens.

The Increasing Adoption of Stablecoins

The adoption of any new medium of exchange depends on its store of value and its utility as a means of payment. Stablecoins are significantly different compared to traditional cash or bank deposits, with their main strength being their attractiveness as a form of payment. Its global reach, low costs and speed are all advantageous to its growth. They have an open architecture that allows easy integration with the digital application as opposed to the proprietary legacy systems of banks and other financial institutions. Perhaps the biggest advantage of stablecoins comes from its network that allows participants to transact like using social media. All of these advantages make stablecoins well-positioned to integrate into our digital lives.

What does the future hold for Euro-backed stablecoins?

Despite the optimistic views that many industry experts and analysts have, it is still too early to predict whether Euro-backed stablecoins will eventually compete with and overtake USD-backed stablecoins like those mentioned above. The biggest concern is regulations, with the EU set to introduce stringent rules to crack down on cryptocurrency transfers and protect the economy against money laundering. Stablecoin issuers also have the added disadvantage of finding a bank partner in Europe who will be willing to open accounts for crypto-related transactions, which are far and few between. Cryptocurrency companies are facing increasing difficulties to open bank accounts in Europe, which could extend to stablecoin projects.

Advantages of Stablecoins

Stablecoins bring with them a host of advantages as part of the whole Defi revolutions. Some of them are mentioned in brief below. These stable coins can make a currency truly borderless and more global than ever, allowing more individuals to access it. They can gain more exposure to the advantages of the Euro via synthetic access, as the Euro has been largely limited to people within Europe.

  • Faster Speed

Stablecoins utilise smart contracts to streamline the escrow process. Settlements and banking are now possible at all hours because the blockchain network doesn’t require a centralized institution to function.

  • Transparency

Stablecoins offer a higher degree of transparency by being regularly audited. As trust in Tether slowly erodes, space for new stablecoins to rise has now been cleared.

  • Lower fees

Credit card companies like Mastercard and Visa charge high processing fees which is why many businesses charge their customers more for credit card purchases. By using stablecoins, you are essentially circumventing past these rules, providing value for both yourself and your businesses.

Euro-backed Stable Coins and the Potential for Cryptocurrency Lending

Lenders and borrowers face significant risks due to the price volatility between the value of fiat and cryptocurrencies. Smart contracts are auto-executing lines of code. To secure a loan, cryptocurrencies have to be sent to a smart contract escrow on the blockchain that will release the collateral when the debt is paid back.

Stablecoins are the best solution to this problem in theory as they are pegged with existing fiat currencies. But when looking at USD-backed stablecoins, it becomes apparent that they present only a limited solution as it is limited to a landlocked market. The market share of USD-backed stable coins is being challenged by the emergence of EUR-backed stablecoins.

The Euro-backed stablecoins will also be more stable as the Eurozone has a stronger economy compared to the U.S. While the fiscal deposit of the Eurozone is 7x is lower than that of the U.S., its current account balance is positive compared to the -2.40% GDP of the U.S. All of these are signs that Euro-backed stablecoins will perform well in the future. If applied correctly, they have the power to offer attractive Euro-pegged deposit yields while cutting cryptocurrency borrowing rates by a minimum of 3%.

Examples of Euro-backed Stablecoins

The following are some of the existing and new Euro-backed stablecoins that have been launched in the market.

  • The Lugh(EUR-L)

Developed by the Lugh Company, this stablecoin’s attestations of backing are being provided by PwC France & Maghreb.

  • Stasis EUR

Stasis EUR is launched by Stasis and is fully backed by the Euro on a 1:1 basis. It is aimed at bridging the distance between the off-chain market and decentralized finance.

  • The Universal Euro(UPEUR)

Developed by the Universal Protocol Alliance, this stablecoin is pegged 1:1 with the Euro and is freely tradable on Bittrex Global.

  • xEURO(xEUR)

xEURO is a stablecoin that acts as an ERC-20 representation of the Euro.

  • Tether EURO

Also known as Euro-coin, Tether’s Euro-backed stablecoins can easily be deposited on OpenLedger, and Coinsbank.

  • Synthetix SEUR

Synthetix SEUR is backed by a synthetic asset platform and has a fully diluted Market Cap of $156,274,086.

Stablecoins are designed in such a way that fluctuations are minimised in their price against a reference or a basket of currencies. Stablecoins have become the subject of debate after social media giant Facebook launched its Libra stablecoin. With that being said, stablecoins have the potential to drive further innovations in payments, resulting in cheaper cross-border payments and remittances. However, a concern among experts is that the control of European payments will be shifted outside the continent if stablecoins are widely accepted. This could raise issues such as tax evasion, money laundering and terrorism financing.

A key challenge for any Euro-backed stable coin remains in the form of consumers hollowing out commercial banks. This is one of the reasons why the ECB has started posting early warning signs about impending rules on deposits. The ECB is worried that private companies and foreign currencies will get benefitted if Euro-backed stablecoins rise.

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