A battle is brewing in stable currency. The US is winning with USDC and USDT, and China is gaining ground, making a push for the title. Hard to say who is going to win the stable game, but someone will.
To show how active this game is, Europe is talking about getting involved; the European Central Bank (ECB) is seriously considering issuing a stablecoin. Last week, a Bank of France Official Agnes Benassy-Quiere compared the US dominance in stablecoin, 90% of the $255 billion stablecoin market, to the Visa and Mastercard duopoly in Europe, a serious issue requiring a sense of urgency.
Let’s admit it, if someone has 90% share of anything, it makes sense to try and take market share away. It should be easy pickings.
Kenneth Rogoff in his outstanding book Our Dollar, Your Problem says, “If the digital euro develops during a period when Europe is becoming more cohesive and the United States less so, the possibility that a digital euro could extend the currency’s reach could suddenly become quite real”.
Can Kenneth Rogoff’s assertion happen, don’t know. But let’s look at some pros and cons, if for no other reason than to be ready for the battle to come.
The Pros
First, an ECB stable currency would jumpstart European banks to get going and develop digital products, a good thing for financial services overall.
Second, The European Union is pretty stable; the global tariff plan has had limited if any economic shock, and inflation is under control. Now may be a good time.
Third, the Euro is already the second largest reserve currency in the world, so there is a role for it in the new digital world.
Fourth, Euro has been stable to strong against the Chinese yuan +16% in three years, and the US dollar +12% ytd. The interest rate is only 2%, so investors aren’t holding for yield. Thus, there is some fundamental strength.
Fifth, the US is presently not cohesive in policy terms, which, in the eyes of Kenneth Rogoff, speaks for European chances.
The cons:
First, Europeans are very concerned about privacy, and an ECB digital currency would be a privacy risk. The mere fact the government knows so much about a person’s currency use will cause many Europeans to shudder.
Second, it could be pure FOMO (Fear of Missing Out). Long-term, decisions based purely on FOMO rarely work out.
Third, strength against the Chinese yuan could be a weakness. China is exporting a lot to Europe, and if Europe wants this to stop then they must devalue the currency. A potential devaluation due to China speaks against a solid stablecoin.
In the end, if Europe wants a good stablecoin, they can probably achieve it, and it can take market share from USDC. The economy has proven resilient. Investors are willing to hold currency at a low yield. There is probably more cohesiveness in European policy than in the US.
The real issue will be against the Chinese yuan. A stable coin needs a stable underlying currency. If there is risk that the Euro will go down to mitigate yuan weakness, a stable may not work.
We will see,
