The European Central Bank is in trouble. We are seeing the end of the euro in the making, for reasons that extend beyond the scope of this article.
However, one of the key moves is forthcoming. The EU is about to greenlight the flow of USD stablecoins issued outside the area. This is despite the protests of the ECB.
What is at risk is the EU simply becoming a "flyover zone" for digital assets. With much of the world embracing stablecoins, the overwhelming percentage US dollar denominated, it puts itself at peril of disconnecting from the global economy.
In other words, the world's reserve currency is only going to get more dominant due to the issuance of stablecoins. Passage of legislation is going to open up an entirely new can of worms, something the leadership at the EU is paying close attention to.
The situation is moving rather quickly.
The European Commission, the executive arm of the EU, is set to soon issue formal guidance that stablecoins issued in other global jurisdictions should be considered interchangeable with same-branded versions designed specifically for European markets, according to a Wednesday report in the Financial Times.
This is a coup for USD stablecoins. The EU is still a powerful economic center albeit facing major headwinds. Stablecoin issuers are gaining access to over 450 million people via this decision.
While the US banking system is facing competition from stablecoins, it is nothing compared to what those in the EU will face. The threat is that deposits are pulled away from banks, reducing the size of their impact.
With the EU, foreign issuers will have no requirement to hold their assets within European banks. It is what the ECB is fighting.
In recent months, the European Central Bank and its president, Christine Lagarde, have adamantly pushed to restrict the ability of foreign stablecoins—and particularly, stablecoins backed by foreign currencies like the U.S. dollar—from playing too large a role in the European market. Under the EU’s newly implemented digital assets rules, stablecoin issuers operating in the bloc must keep most of their reserves for the currency in a European bank.
The net result is that trillions in transactions can occur without the EU banks having any hand. USD stablecoin transactions using a currency such as USDC could operate separately from the EU banking system. While there could be integration, the benefits, from the banks perspective, is felt outside the EU.
This could be a massive blow to the ECB.
One of the key challenges forthcoming is the eventual unfolding of a sovereign debt crisis. Confidence in government is waning. The ECB is already seeing the demand for its debt on the decline.
This is not an isolated situation. Other countries are in the same position, including the United States.
Stablecoins could change this greatly. Since Treasuries are the primary component as the backing agent, demand from stablecoin issuance increases. The ECB can only realize this if there are stablecoins issued backed by its debt.
So far, the ECB has taken this approach. The upcoming change removes the backing in the EU, replacing it with something else.
That is US Treasuries.
Last week, the United States Senate passed the GENIUS Act. This requires all stablecoins issued within the US to be backed by highly liquid assets. At the top of this list is T-bills. Hence we see a potential increase in demand if trillions of stablecoins hit the market.
In other words, legislation is effectively building in buyers.
The biggest challenge facing the EU in this matter is the regulation. Long known as the regulation epicenter, the EU is now trailing the United States and Asia in technology.
When talking about cryptocurrency and digital assets, we are no longer exclusively in the world of finance. Instead, we are also dealing with technological advancement.
Here is where the EU is backed into a corner.
The largest, most powerful technology companies in the world are in the US or China. There are no Amazons, Tencents, or Metas in the EU. Development was forced out due to onerous regulations, something that is not going to change.
Since the entry of the Trump Administration, there was an aggressive pro-crypto stance. The same is true for AI. My view is these will not be two separate technologies. They are going to compliment each other, operating as one.
With regards to stablecoins, for the moment the EU is focusing upon its place in the world. It cannot allow itself to be passed over through isolationism. They simply cannot export their tech when it comes to stablecoins. The rest of the world is making their decision and stablecoins tied to the euro are not in the equation.
Following the ECB would result in the EU being severed from the global economy, at least to a degree. The leadership cannot allow that to happen.
For this reason, it is smart to allow the entry of USD stablecoins into the market. There really is no other option.
