A perusal of the landscape & the path to adoption: Stabletokens & CBDCs
Welcome to another round of our ongoing exploration, explanation and inquiry of the world of digital assets, blockchain and cryptocurrencies.
We are using this latest blog post to delve into the significance of stabletokens and CBDCs in the context of changing regulations, (institutional) adoption trends, and the current project landscape. The topic begs for attention particularly in light of the recent delisting of Tether’s USDT from OKX Exchange for EU users – likely a forbearing of regulatory changes and standards on stabletokens under upcoming EU rules under MiCA. As regulatory authorities worldwide intensify their scrutiny of digital assets, exchanges and issuers alike are forced to adapt to comply with growing subtlety of investor protection.
Growing evidence also suggests, that stabletokens and CBDCs may be the missing puzzle piece to mainstream and institutional integration of cryptocurrencies, another reason to devote the topic an assessement. With the notable trend towards corporate and financial institutions embracing digital assets, stablecoins start to emerge as a reliable bridge between traditional finance and the crypto space.
Against this backdrop, we of course also examine the current landscape of stabletokens and CBDC projects. A diverse array of stablecoin projects, including , Allunity, LiraFi, and others promise to reshape the European financial landscape, providing stable and efficient means of transacting in digital assets. Similarly, CBDC initiatives, such as the Digital Euro and Digital Swiss Franc (DSF), are gaining momentum, reflecting a concrete effort by central banks and financial institutions to leverage blockchain technology for enhanced financial services.
An understanding of CBDCs and various types of Stabletokens
Stabletokens and Central Bank Digital Currencies (CBDCs) are pivotal blockchain innovations reshaping the landscape of digital and traditional finance. While both are digital currencies with stabilised value and serving to facilitate digital transactions, they do so through distinct mechanisms and under different regulatory frameworks.
Stabletokens, as the name implies, are crypto (blockchain-based) tokens engineered to maintain a stable value relative to a reference asset, such as fiat currency or commodities. They offer users a reliable store of value and medium of exchange within the volatile cryptocurrency market. Stabletokens can be grouped according to their unique approach to maintaining stability:
- Fiat-backed stablecoins are pegged to traditional currencies like the US dollar or euro and are backed by corresponding reserves held in custody.
- Crypto-backed stablecoins, on the other hand, are collateralized by cryptocurrencies, providing stability through overcollateralization and smart contract mechanisms.
- Algorithmic stablecoins rely on algorithmic mechanisms to adjust the token’s supply dynamically, ensuring price stability without the need for traditional reserves.
Stabletokens are typically issued by private entities, such as companies or organizations and are often used as a medium of exchange, a unit of account, and a store of value within cryptocurrency ecosystems. Examples of stabletokens include USD Token (USDT) by Tether, USD Coin (USDC) by Circle, and Dai (DAI) by MakerDAO.
CBDCs in contrast represent digital representations of a country’s fiat currency issued by the central bank. As sovereign digital currencies, CBDCs bear the backing and authority of the state, serving as legal tender for digital transactions. They are fully regulated and controlled by the central bank or monetary authority of a country. CBDCs offer governments and central banks greater control over monetary policy and financial stability while enabling enhanced transparency and efficiency in payment systems. CBDCs serve as legal tender and are typically used for retail transactions, government payments, and interbank settlements. They can be used to achieve various policy objectives, such as enhancing financial inclusion, reducing transaction costs, and combating illegal activities.
CBDCs can be issued in two main forms:
- Retail CBDCs, which are directly accessible to individuals and businesses,
- Wholesale CBDCs, which are used for interbank settlements.
While both stabletokens and CBDCs operate in the digital realm, they differ significantly in terms of issuance, backing, regulatory oversight, and use cases. In this blog post, this distinction matters considerably, as we delve deeper into use cases and the path to institutional and mainstream adoption of cryptocurrencies and implications for the future of finance.
Prominent Stabletoken and CBDC projects and developments in Europe and Switzerland
For the sake of this post we keep our focus on the stabletoken / CBDC developments in Switzerland and wider Europe. Both the continent as well as Switzerland in specific have emerged as dynamic centers for crypto innovation, with a plethora of initiatives and projects on digital currencies driving forward the digital transformation of finance.
Across Europe, Central Bank Digital Currency (CBDC) projects and trials are not merely theoretical concepts but tangible efforts by central banks to explore the potential benefits and challenges of digitizing fiat currencies. For instance
- Digital Euro The project spearheaded by the European Central Bank (ECB) aims to introduce a sovereign digital currency backed by the full faith and credit of the eurozone. The digital Euro is a retail CBDC, i.e. accessible to the general public for everyday transactions. It promises enhanced financial inclusion, innovation, and improved efficiency of cross-border transactions within the European Union.
- Digital Swiss Franc (DSF): The Swiss National Bank (SNB), renowned for its commitment to innovation in the financial sector, is actively exploring the development of a digital Swiss currency, leveraging Switzerland’s position as a global leader in blockchain technology to create a secure, efficient, and transparent digital currency. The DSF is intended as a wholesale CBDC, meaning it is designed for use by financial institutions and central banks themselves for large-value interbank transactions, to facilitate the efficient functioning of the financial system. See more here
These CBDC initiatives represent significant milestones in the evolution of digital finance, heralding a new era of monetary innovation and collaboration between central banks and technology providers.
Also stabletoken initiatives have proliferated in both Europe and Switzerland, endeavouring to offer users stable and reliable digital assets for transacting in the burgeoning cryptocurrency ecosystem. Notable projects are
EUR CoinVertible (EUROCV) by Forge is a stablecoin project backed by a consortium of European financial institutions, aiming to provide users with a secure and transparent digital representation of the Euro. The project’s primary objective is to facilitate cross-border transactions and promote financial inclusion within the eurozone. By leveraging blockchain technology and smart contract capabilities, EUROCV seeks to offer users a reliable means of transacting in digital assets while maintaining stability relative to the euro. One of the key strengths of EUROCV is its strong backing from established financial institutions. This support provides credibility and trust in the reliability of EUROCV as a digital asset. Additionally, EUROCV’s focus on compliance with regulatory standards ensures that the project adheres to the highest levels of transparency and security, mitigating potential risks associated with regulatory uncertainty. EUROCV may face challenges in achieving widespread adoption due to competition from other stablecoins and regulatory hurdles. Moreover, the success of EUROCV will depend on its ability to address scalability issues and user adoption barriers effectively. Overall, EUROCV holds promise as a stablecoin project that aims to bridge the gap between traditional finance and the digital economy within the eurozone. Look here to see current EURCV in circulation.
AllUnity by Flowtraders, Galaxy and DWS is an EU-based stablecoin project that seeks to redefine stability and inclusivity in the digital asset space. Unlike traditional stablecoins backed by a single fiat currency, AllUnity utilizes a diversified basket of fiat currencies and commodities as collateral. This approach mitigates the risks associated with currency fluctuations and provides users with exposure to a broader range of assets, enhancing the stability and resilience of the AllUnity stablecoin. The driving organization behind AllUnity is committed to promoting financial inclusion and sustainability in the digital economy. By offering a stablecoin solution that is accessible to users worldwide and resistant to the volatility of individual fiat currencies, AllUnity aims to bridge the gap between traditional finance and the digital economy. Additionally, AllUnity’s focus on sustainability aligns with growing concerns about environmental impact within the cryptocurrency space, attracting users who prioritize eco-friendly solutions. One potential challenge for AllUnity is establishing itself amidst a crowded stablecoin market dominated by established players. However, its unique approach to stability and inclusivity could differentiate it from competitors and attract users seeking a more resilient digital asset. Overall, AllUnity holds promise as a stablecoin project that seeks to promote financial inclusion, sustainability, and stability in the digital asset space.
Swiss StableCoin (SSC) is a Swiss stabletoken initiative aimed at redefining stability and reliability in the digital asset space. The Swiss Stablecoin intends to enhance the existing payment infrastructure of Switzerland, is anchored in the regulated financial markets and aims to meet the needs of the economy. It claims a 1:1 backing by CHF (fiat-backed stabletoken) and a 24/7 availability. SSC operates with the guiding principles to ensure legal certainty, sovereignty and openness. Last June the startup announced an official partnership with PostFinance and with that partner “Cardossier” as first usecase.
Even a brief look into the features, use cases, and potential impact of selected stabletoken and CBDC projects, makes it evident that these initiatives are not merely technological experiments but catalysts for change in the financial landscape. By providing users with secure, transparent, and efficient means of transacting in digital assets, stabletokens and CBDCs have the potential to unlock new opportunities for economic growth, financial inclusion, and innovation.
As these projects continue to evolve and mature, they will play an increasingly integral role in shaping the future of finance in Europe and Switzerland, paving the way for a more inclusive, resilient, and sustainable digital economy.
New EU Regulations on Stabletokens under MiCAR
MiCAR
The regulatory landscape surrounding cryptocurrencies and digital currencies in Europe is undergoing significant changes, with the introduction of policies and regulations aimed at fostering transparency, stability, and consumer protection. At the forefront of these regulatory developments is the Markets in Crypto-Assets Regulations (MiCAR) framework established by the European Commission. MiCAR seeks to establish a comprehensive regulatory framework for crypto-assets within the European Union. The recently published draft rules for stabletokens under under MiCA outline the obligations and requirements for issuers and service providers operating in this space.
for more information on MiCAR see our blog post here
Stabletoken draft regulations
The European Union (EU) financial regulators now made the initial efforts to bolster the regulatory oversight of stablecoins within the MiCA framework: On March 13 the EBA (EuropeanBanking Authority) released draft regulatory standards tailored for stablecoin issuers. The “Regulatory Technical Standards” (RTS) issued protocols on March 13 by intend to be a framework for stablecoin issuers to manage complaints in this sector.
Currently, the draft rules on stabletokens under MiCA are in the consultation phase, with stakeholders providing feedback and input to shape the final regulatory framework. The effort on the draft rules reflects the European Commission’s commitment to engaging with industry stakeholders and considering their perspectives in the policymaking process. As it stands, the proposed regulations aim to introduce a harmonized approach to stabletoken regulation across the EU, providing clarity and certainty for issuers and users alike.
A first glance of the proposed regulations reveals their potential impact on stabletoken issuers and users. By imposing requirements such as mandatory authorization and disclosure obligations, the regulations aim to enhance investor protection and market integrity while mitigating the risks associated with stabletoken issuance and trading. Additionally, the proposed regulations seek to address concerns regarding stablecoin stability and reserve adequacy, ensuring that stabletokens maintain their peg to the underlying asset.
More stringent EU regulations on stabletokens under MiCA represent a significant step towards establishing a comprehensive regulatory framework for crypto-assets in Europe. By providing clarity and certainty for stabletoken issuers and users, the regulations aim to foster trust and confidence in the European stablecoin market, paving the way for increased adoption and innovation in the digital economy.
Impacts of new stabletoken standards
The emergence of new EU & Swiss stabletoken standards holds significant implications for the future of digital finance and cross-border transactions. As stablecoin projects continue to evolve and mature, industry stakeholders are actively exploring innovative approaches to stability, transparency, and regulatory compliance. These emerging standards have the potential to shape the trajectory of stabletoken development and adoption, with implications for financial operations and international trade. Regulatory clarity and certainty are essential drivers of market confidence and investment, providing stability and predictability for businesses and consumers. With clear guidelines on compliance and oversight, stablecoin projects may find it easier to navigate the regulatory landscape and attract investment, leading to increased adoption and innovation in the European stabletoken market. The Bank for International Settlements (BIS) is actively exploring the potential of stablecoins within the G20’s plan to improve cross-border payments, highlighting the growing recognition of stablecoins as a viable solution for enhancing the efficiency and transparency of global financial transactions.
By fostering collaboration and dialogue between regulators, industry participants, and technology providers, we can ensure that stabletoken standards promote financial inclusion, integrity, and efficiency while addressing emerging challenges and opportunities in the digital asset ecosystem.
Alongside the widespread benefits and positive impacts of standardisation, there are potential risks of growing regulation of an innovative space – a few of them are considered here:
- Potential stifling innovation through overly prescriptive regulations. Striking a balance between regulatory clarity and flexibility is crucial to ensure that stabletoken standards do not inadvertently impede the development of new and innovative stablecoin solutions.
- Risk of unintended consequences, such as increased regulatory compliance costs for stablecoin issuers and potential barriers to entry for new market entrants or potentially driving activity underground or into less regulated sectors.
- Also, the effectiveness of stabletoken standards may vary across jurisdictions, leading to regulatory arbitrage and market fragmentation.
The balance of innovation and its regulation is a tricky one. By carefully assessing these risks and working collaboratively to address them, stakeholders can maximize the benefits of stabletoken standards while mitigating potential drawbacks, fostering a more resilient and inclusive digital asset ecosystem
Conclusion: Regulated and innovative Stabletokens & CBDCs today & tomorrow
This assessments on CBDCs and stabletokens, the latest standards and regulatory leaps show clearly that we are at a pivotal moment in the evolution of financial innovation. The future trajectory of stabletokens and CBDCs in Europa and Switzerland holds immense promise for stability in the unpredictability of crypto markets – with increasing regulatory clarity, technological advancements, and market demand driving growth and innovation. Speculating on the future, we anticipate a continued proliferation of stabletoken projects, fuelled by regulatory compliance and innovative standards, hopefully skilfully navigating the fine line to overregulation and smothering of innovation. These projects will play a vital role in facilitating more efficient and cost-effective financial operations, particularly in the context of international trade. Also the regional and wider CBDC initiatives are poised to revolutionize the way (central) banks interact with digital currencies, offering new avenues for financial inclusion and innovation, reduced counterparty risk, additional tools for monetary policy effectiveness and other benefits.
In closing, the evolving regulatory landscape, coupled with emerging standards and continuous effort on innovative projects, underscores the transformative potential of stabletokens and CBDCs in reshaping the financial digitisation. Of course, challenges remain; including the need for continued collaboration between regulators, industry participants, and technology providers to ensure that regulatory frameworks are balanced and conducive to innovation. By embracing regulatory compliance, fostering innovation, and promoting transparency, Europe and Switzerland can position themselves as global leaders in the digital finance revolution, paving the way for a more inclusive, resilient, and innovative financial future.
