“Blockchaining” the Euro

  • “Stable Coins” are the attempt to combine the advantages of Blockchain technology with the stable value of the Euro, US Dollar or Yen.
  • Put simply, these are cryptocurrencies that are meant to be 100% covered by a customary Fiat currency (or another underlying asset).
  • Although the advantages promised must first prove to be real, the approach is definitely promising.

How can the advantages of Blockchain technology be combined with the stability of Fiat currencies such as the Euro, US Dollar or Yen? The answer is something representatives of both the traditional financial industry and the “Crypto Community” consider central to the future of cryptocurrencies. After all, the immense volatility of these currencies (to be observed among even its most prominent representatives such as Bitcoin, Ether or Ripple) is a central weakness, in particular as regards confidence and broad public and corporate acceptance. Central bank money in a digital guise for the broad mass of the population could essentially solve this problem. However, the established central banks are finding it difficult to take the necessary steps as they believe there is not yet a need and there are therefore related potential risks to the stability of the existing financial system.

“Stable Coins” – the combination of stable value and cryptocurrency

A private and decidedly promising approach: so-called “Stable Coins”. Put simply, these are cryptocurrencies or tokens that are meant to be completely covered by a conventional Fiat currency (or another underlying asset such as gold). Some speak in this context of “securitization” of traditional money. New token units are thus only created if they are acquired using the corresponding underlying asset. Any payment then involves the destruction of the crypto-token. The complete cover thus guaranteed is meant to ensure the cryptocurrency remains stable relative to the respective underlying asset, be it the US Dollar or the Euro.

Younger service providers would appear to have learned from the experiences of the sector trailblazer “Tether”. While this crypto-token, which was launched in 2014 with a market capitalization of about USD 2.6 billion, remains the most important of its kind, in recent months doubts have repeatedly been voiced about the 100% coverage in US Dollars that the companies involved have to date not been able to completely dispel. Moreover, there is the objection that Tether could have been used to artificially distort the Bitcoin price upwards. More recent issuers of Stable Coins, including TrueUSD and USD-Coin, whose start was announced for this summer, have by contrast opted for close cooperation with the regulators and transparency as regards the underlying assets.

The best-known Stable Coins are covered by US Dollars but it recently became known that Fintech corporation STASIS, domiciled in Malta, intended to float a token based on the Euro at the end of June – and would be doing so in compliance with the EMU regulatory regime and under the eagle eye of a renowned auditing company. This token, the EURS, is supposed to not only enable swift transfers between cryptocurrencies or in the traditional Fiat currencies, but, so the originators, any security that has an International Securities Identification Number (ISIN) can be converted into EURS.

The advocates of the approach believe that Stable Coins will sooner or later become part of everyday life and will be used for customary shopping. After all, this could offer a way for simply, swiftly and cost-effectively performing financial transactions across national borders and without being exposed to the risk of immense price fluctuations, as is the case with Bitcoin et al. Stable Coins may at first sight seem uninteresting for investors backing the rising prices for cryptocurrencies. At second glance, however, they may prove to be a safe haven during uncertain market phases or be used to hold liquidity.

Conclusion

Stable Coins, as they are known, try to combine the stability of the world’s major currencies along with the confidence associated with them and the technological advantages of Blockchain technology. A key role is played here by close cooperation with the regulators and transparency as regards the collateral assets backing the Stable Coin. To what extent the promises made by the private issuers as regards improved efficiency, security, costs and time savings for financial transactions (not just between cryptocurrencies but precisely as regards traditional securities) prove to be true remains to be seen. Be that as it may, they most certainly constitute a very promising approach to enable traditional investors to enter the cryptocurrency market and/or render payment transactions more efficient. The key to the success of a Stable Coin is definitely how confidence is built and maintained, just as is the case with a central bank. Dyed-in-the-wool cryptocurrency advocates will by contrast view Stable Coins, if at all, merely as a first step in the right direction. After all, there can be no talk of this replacing the existing monetary and financial system with central banks and regulatory authorities, as pundits often demand.

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