The European Union have been alerted by the growth of USD stablecoins, and are now contemplating new steps to accelerate the launch of the digital euro
The European Union (EU) is reportedly looking to accelerate the launch of its central bank digital currency (CBDC), the digital euro, following the recent passing of the US GENIUS Act.
The Financial Times reported on August 22 that EU officials were “rethinking plans for the digital euro” as the passing of the US stablecoin regulatory framework “rattled a lot of people” into shifting plans to “speed up” the process.
The GENIUS Act is the overarching regulatory framework for the issuance and distribution of stabelcoins in the US. Stablecoins must be 1:1 backed with its pegged fiat currency and hold 100% in reserves and collateralisation.
The global stablecoin market is largely dominated by USD-backed stablecoins and according to George Osborne, ex-UK Chancellor, control 99% of the global stablecoin market.
The growth of the stablecoin market has seen the likes of Tether and Circle enhance the adoption of their leading USD-backed stablecoins, USDT and USDC, respectively, and will look to further grow under the guidance of the GENIUS Act.
Cautious of this growth, European Central Bank (ECB) board member Piero Cipolloine warned in April that the continued rise of US dollar stablecoins could “raise concerns for Europe’s financial stability and strategic autonomy”.
What’s the difference?
A CBDC is a digital form of central-bank money; in other words, a direct liability of the central bank which acts as legal tender with risk-free settlement finality.
A stablecoin, on the other hand, is privately issued tokenised money, typically backed by reserves. It’s a claim on the issuer (or a trust), so holders face issuer, reserve, and operational risks, and par redemption depends on governance and regulation.
CBDCs can be retail or wholesale and integrate with real-time gross settlement systems and other national payment rails. Stablecoins usually ride public blockchains, offering programmability and faster cross-border transfers but requiring robust KYC/AML, attestations, and liquidity/risk management.
EU wants to less reliant on US
Much of the EU’s push to launch the digital euro has been to become less reliant on foreign currencies in a bid to strengthen the Euro.
While USD controls the global stablecoin market, there are several Euro-backed stablecoins circulating. Circle has its EURC stablecoin that could potentially grow across the continent due to being a licensed stablecoin issuer under the Markets in Crypto Assets (MiCA) regulation.
EURC currently has a market cap of $226m, according to Coinmarketcap, and reached record supply numbers of 217 million in circulation last April.
However, despite Circle’s European push, the EU and ECB have been developing the digital euro as their answer to the widespread growth of digital payments and less reliance on cash.
Being deployed as a digital currency for payments primarily across the Eurozone, the EU may also be hoping for the digital euro to deter European consumers from adopting USD stablecoins to perform payments.
Cipollone echoed concerns previously raised by ECB President Christine Lagarde, stressing “Europe cannot afford to rely excessively on foreign payment solutions”. Lagarde’s warning, originally focused on the dominance of Visa and Mastercard in the card market, now appears to extend into the digital asset space.
Do public blockchains hold the answer?
Stablecoins have so far primarily been used by companies for cross-border payments, where they enable instant settlement and lower remittance fees.
CBDCs offer similar cross-border value. However, critics of CBDC’s (primarily within the US) believe these instruments impede on customer privacy due to the authority issuing the CBDC gaining insight into transaction data.
In response to the surging growth of stabelcoins in the US, the Financial Times revealed EU officials are considering adopting public blockchains, such as Solana and Ethereum, instead of a private blockchain for the digital euro to run on.
Sources close to the recent talks happening from within the EU state some officials are now taking the move to public blockchains “more seriously now”.
