Author: Macauley Peterson, Blockworks; Translated by Bai Shui, Jinse Finance
As of December 30, 2024, the MiCA regulation will officially take effect, marking a turning point in the European Union's attitude towards crypto assets.
Although the euro plays an important role in TradFi - accounting for 20-30% of global foreign exchange reserves, SWIFT transactions and trade flows - its share in global stablecoin circulation is less than 0.5%.
Industry expert and Circle's EU policy lead Patrick Hansen expects this to change. He emphasized the importance of MiCA as the "most comprehensive global crypto asset regulatory framework".
"The EU has a unique opportunity to position itself as the global center of crypto innovation," Hansen pointed out.
Reasons for the euro's lag in stablecoins
Hansen attributed the differences between on-chain euros and the US dollar to the following factors:
1. Dollar-dominated liquidity: "The network effects around dollar-denominated stablecoins are something the euro stablecoins cannot catch up with. European users interacting with the global crypto market will choose the cheapest and most liquid currency."
2. Historical negative interest rates: "For a long time in the Eurozone, negative interest rates have called into question the business model of stablecoins."
3. Regulatory uncertainty: Prior to MiCA, euro stablecoins lacked a dedicated regulatory framework, hindering the development of institutional participants.
MiCA solves the third point by creating a clear framework for stablecoins. Hansen noted that the enactment of this law has already sparked interest from institutions, with major European banks and other participants exploring or launching euro stablecoin products. He highlighted that Circle has launched EURC, which is fully backed by a French-regulated entity, and noted that "we've seen EURC supply grow 60-70% thanks to its launch on multiple blockchains."
MiCA requires stablecoin issuers to hold reserves proportional to the tokens circulating in the EU. Hansen explained that Circle uses a "dynamic rebalancing" model to comply with the regulations.
"If we see an increase in USDC held in the EU, we will correspondingly increase our European reserves," he said.
Integrating on-chain euro use cases
Hansen believes there are two main drivers for the adoption of euro stablecoins: regulated crypto capital markets and real-world applications of stablecoins.
"Only stablecoins authorized under EU rules will ultimately be used as trading pairs in regulated crypto markets," Hansen stated. "I wouldn't be surprised to see significant growth in this area."
This change has prompted crypto exchanges to delist USDT from trading pairs with EU customers.
Hansen indicated that use cases such as cross-border payments and tokenized financial instruments are gaining attention. "Enterprises in the Eurozone will inevitably demand euro-denominated assets for risk management," he said.
However, while MiCA provides a solid foundation, Hansen warned that it is only "version 1.0" and must evolve to address new challenges. He also cautioned that the EU's Travel Rule (TFR) requiring additional user verification for certain transactions may create friction, especially for self-custodied wallets.
Ultimately, the success of MiCA will depend on its ability to strike a balance between promoting innovation and protecting consumers, while creating a competitive local market.
As Hansen said, "Only time (and the market) will tell whether MiCA can achieve its objectives."
