[Reuters Breakingviews] EU bank stablecoin push is better late than never

By Pierre Briancon

BERLIN, Sept 25 (Reuters Breakingviews) - Nine European banks are not intimidated by the tiny size of the market for euro-based stablecoins. UniCredit CRDI.MI, ING INGA.AS and other European Union lenders say they want to launch such a “trusted payment standard” – cryptocurrencies whose value is in theory pegged to a basket of safe liquid assets. It makes sense for the banks to brace for increased competition from U.S. dollar-denominated stablecoins, and for the possible arrival of a digital euro that could be launched by the European Central Bank in 2029. The banks will however have to convince potential users that it is a technology they do need, and that it is indeed stable and redeemable on demand.

Euro-based stablecoins currently constitute a tiny 1% of an overall market worth more than $300 billion. Of that, Tether has 60%, with U.S.-based Circle the second largest player. The dominance of U.S. dollar-based products could increase even further after the so-called GENIUS Act passed by Congress, which provides a safe regulatory environment, and Washington’s stated intention to use stablecoin growth to boost demand for Treasury bills and help finance its budget deficit. The instruments also provide a convenient way for users in developing economies to hedge against weak currencies.

Europe has had its own Markets in Crypto-Assets regulation (MICA) directive since last December, but euro-based stablecoins haven’t taken off. For them to gain wide acceptance, the banks will have to convince potential users they need them. The EU is still without a fast and efficient trans-border payment system, remains fragmented, and depends on Visa and Mastercard for most of its electronic transactions – with the corresponding data then fleeing to the U.S. But as financial players slowly adapt, the need for euro stablecoins may recede.

Issuers of stablecoins will also have to find a way to reassure about the “stable” part of their offer. The official party line is that the tokens’ value is guaranteed, so they can be redeemed on demand instantly and freely. Strong regulation of the issuers and regular reporting requirements can ensure that the assets backing the pool of stablecoins keep their value – if they depreciate, the issuer is required to top them up in cash or buy additional assets. But “backed” is not synonymous with “redeemable”. In case of panic, some holdings such as government bonds cannot be sold instantly – even if the assets, as required, have been properly ring-fenced.

Solid EU lenders, in that respect, could give users a bit more confidence that their assets are safe. The stablecoin fine print will matter. But if banks want to stop their customers wondering whether they still have a role, they have little choice but to play the game.

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CONTEXT NEWS

A consortium of nine European banks including ING and UniCredit said on September 25 they had formed a new company to launch a euro-denominated stablecoin.

The new company is based in the Netherlands and aims to be overseen and licensed by the Dutch central bank.

Market cap of the largest stablecoins