The quiet rise of euro-backed stablecoins

The euro and the U.S. dollar are both central to the global financial system, yet these fiat currencies are not equally presented in the cryptocurrency market. While the dollar dominates the stablecoin sector, the euro lags far behind despite its wide usage in the “traditional” global economy.

As euro-backed stablecoins grapple with regulatory challenges, market dynamics and competition from their USD counterparts, recent developments such as the EU's implementation of the Markets in Crypto-Assets (MiCA) law are reshaping the market. This article explores key factors driving this disparity, the impact of new crypto regulation, and the potential future of euro-denominated stablecoins.

How popular is the euro compared to the dollar?

The U.S. dollar is more than just a national currency, it is an international unit of exchange and the primary global reserve currency. According to the Currency Composition of Official Foreign Exchange Reserves (COFER) survey conducted by the International Monetary Fund (IMF), over 58% of all foreign currency reserves worldwide were held in USD in the second quarter of 2024.

The euro, the multinational currency of the European Union, has been steadily holding the second position, accounting for more than 18% of total global currency reserves. In 2023, the euro facilitated over 60% of exports of goods and services beyond the eurozone, showcasing its critical role in international trade.

Despite having great significance in the global economy, the euro has struggled to establish a comparable presence in the cryptocurrency market, which remains dominated by USD-pegged stablecoins. These digital assets, designed to represent fiat currency exposure, have overwhelmingly relied on the dollar for accounting and reserves.

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As of December 25, 2024, the total market capitalization of fiat-backed stablecoins was $186.24 billion, according to data from CoinMarketCap. In stark contrast, euro-pegged stablecoins collectively accounted for just over $356 million, representing a mere 0.2% of the market.

Why are euro-backed stablecoins lagging so far behind their USD counterparts, despite Europe's dense population and advanced economy?

Why are fiat stablecoins important for the crypto market?

Stablecoins play a pivotal role for cryptocurrencies by providing a stable and reliable unit of exchange. Unlike traditional cryptocurrencies, which can experience sharp price fluctuations, stablecoins are pegged to assets like the US dollar or other fiat currencies, ensuring their value remains relatively constant. This stability makes them an ideal medium for both traders and consumers, as they can be used for seamless transactions, reducing the risk associated with price swings.

With this role, stablecoins are increasingly utilized in crypto transactions, from payments in different businesses such as real estate, travel and online gaming, to cross-border remittances and decentralized finance (DeFi) protocols. In fact, an investment fund a16z crypto forecasts that tokens with the stable price, bound to fiat currency reserves, will completely dominate the crypto payment space in the near future.

Wide usage if stablecoins is driving the crypto market closer to mainstream adoption, offering a practical solution for those seeking the benefits of blockchain technology without the volatility.

Reasons euro-based stablecoins are still unpopular

The dominance of USD-pegged stablecoins over euro-linked counterparts is influenced by user preferences, regulatory challenges within the EU, historical market developments, and economic incentives favoring USD-backed assets. Here is the more detailed breakdown of reasons:

1. Historical precedence and network effect. USD-pegged stablecoins were among the first to enter the cryptocurrency market, establishing a strong user base and extensive integration into various platforms and apps. This early adoption created the network effect that reinforced their dominance, making it challenging for newer euro-pegged stablecoins to gain a foothold.
2. Market demand and liquidity. USD leads in global finance, serving as the primary reserve currency and a standard for international trade. Such a wide acceptance translates into higher demand for USD-pegged stablecoins, which aligns with the high liquidity and integration with numerous exchange platforms due to historical reasons. In contrast, euro-pegged stablecoins experience less demand, resulting in lower liquidity and limited adoption.
3. Economic incentives. Issuers of USD-pegged stablecoins often benefit from the ability to invest reserves in interest-bearing assets, generating revenue from the significant demand and large market capitalization of these stablecoins. In contrast, the lower demand for euro-pegged stablecoins results in smaller reserves and reduced opportunities for such investments, making them less economically attractive for issuers. 
4. Regulatory environment. The European Union's regulatory framework, particularly the MiCA regulation, imposed stringent requirements on stablecoin issuers starting from July 2024. MiCA mandates high reserve ratios, with up to 60% of reserves to be held in cash deposits for significant stablecoins. This requirement impacted profitability and exposed stablecoin issuers to credit risks associated with banking institutions, having at least a temporary negative effect on the adoption of euro-pegged stablecoins.

How MiCA influences euro stablecoins

The European Union’s reputation for stringent regulation has also affected major stablecoin issuers with the Markets in Crypto-Assets (MiCA) framework.

Albeit relatively low liquidity and limited presence on cryptocurrency exchanges, Stasis Euro (EURS) holds the title of the first euro-pegged stablecoin to date. Along with Tether’s EURt, it was highlighted in a 2022 European Central Bank report examining the euro’s performance and potential in the stablecoin market. As of now, EURS boasts the highest market capitalization among euro-backed stablecoins, valued at approximately $129 million, according to CoinMarketCap.

There are no mentions of MiCA on EURS’s official website. Nevertheless, announcing the partnership with this stablecoin issuer in July 2024, a tokenization company Stoblox noted Stasis euro fully complies with MiCA, while its reserves are held at the Lithuanian Central Bank and audited by the global accounting firm BDO.

The U.S. company Circle, known for adhering to regulatory requirements, became the first company to secure an Electronic Money Institution (EMI) license in France under MiCA. This milestone enabled Circle to safely launch its euro-backed stablecoin, EURC, for EU crypto users and investors, in addition to the second most popular USD-backed stablecoin, USDC. In August 2024, Circle successfully deployed EURC on the Base blockchain.

Tether, the issuer of the world’s most widely used stablecoin, USDT, initially offered a euro-pegged asset, EURt. However, in November 2024, Tether announced it would cease EURt operations, citing MiCA as the primary reason. Shortly thereafter, reports surfaced of EU crypto exchanges preparing to delist Tether's USDT by 2025 due to non-compliance with EU regulations. To maintain a presence in the European market, Tether backed a company StablR, a compliant euro-stablecoin issuer.

Another entrant in the euro stablecoin space is Banking Circle, a Luxembourg-based company that launched Eurite (EURI) in August 2024. With a market capitalization of around $33 million, EURI is ranked third among euro stablecoins. However, it holds the second-highest average daily trading volume, supported by listings on Binance and other platforms.

Is the future of euro stablecoins bright?

Although stricter regulations under MiCA might initially seem like a setback for the EU's crypto market, the data tells a different story: the implementation of clearer rules has revitalized trading activity across the region.

According to the latest report, “The State of the European Crypto Market”, prepared by the intelligence platform Kaiko in collaboration with leading EU-based crypto exchange Bitvavo, the trading volume of euro-backed stablecoins steadily grew throughout 2024, regularly surpassing the $300 million monthly mark. Following the enforcement of MiCA provisions specifically addressing stablecoins, trading volume surged to nearly $800 million in November 2024, marking a significant milestone for the sector.

This data highlights the ongoing evolution of the crypto market in the European Union, which is increasingly integrating euro-denominated trading instruments. Stablecoins, essential for crypto payments and exchange operations, have already benefitted from the EU’s predictable regulatory framework. With this foundation in place, euro-backed tokens are poised for substantial growth within Europe's massive economy.