The benefits of digital assets, blockchain, the use of smart contracts are widely praised. This market has been the subject of the largest investments over the past 2 years. The investment of VCs in this sector is estimated at $6bn worldwide in 2018 and 2019, half of which in the US and UK, and 20% in Asia. By way of comparison, the sum of $6B represents 10% of the total investments made this year by VCs in the US, all categories combined.

However, the effects are slow to be perceptible in France, whether in use or in the creation of start-ups and jobs. Why ? For a simple reason: the market cannot develop in Europe and in the euro under current conditions. The euro has not started to be “digitalized”, and is therefore not usable by these new technologies. To activate this ecosystem it is necessary to have a “euro” digital asset (ie Stable Coin Euro), ie a stable representation of a euro on a blockchain.

To create its adoption, it must start by quickly making it available to operators who already trade the market through USD stablecoins, because this is where the market is formed and activated. Around the world, millions of dollars are traded every day thanks to regulated stablecoins such as USDC (Coinbase and Circle initiative) or PAX (Paxos initiative).

In a context of general cacophony around Libra, it is essential for Europe to be aware of such a tool, in order to become internationally competitive and not to be overtaken by the US and China (which already has a national coin stable ). For example, LGO ‘s 35 institutional clients alone traded over $300m on our exchange using USD stablecoins.

The ambition of this forum is simple: to explain the technical and regulatory nature of a stablecoin, to show the success of American initiatives and to convince of the usefulness of such an instrument.

What is a stablecoin? 

A stable coin is nothing more than the representation of a unit of currency on a blockchain. It is therefore a token whose value is fixed – in the case of a euro stablecoin 1 token = 1 euro.

There are several ways to guarantee the value of a stablecoin. Maker DAO , for example, offers a completely decentralized method: the value of each DAI (the stable USD coin issued by Maker DAO) is maintained by collateralization mechanisms for cryptocurrencies such as Ether according to the price of these assets on sources of benchmark cash.

However, the centralized method remains the simplest: a stablecoin is the combination of a bank account and a smart contract. With each deposit or withdrawal of money from the bank account, an issue or destruction of token must be associated by the smart contract. At all times, the amount of currency in the bank account must be equal to the number of tokens in circulation. The issuing entity of the stable coin manages this bank account as well as this smart contract and must guarantee incoming and outgoing liquidity, because it is indeed this entity which performs the currency-stable coin conversion operations. Please note: it is not necessarily the funds of the issuing entity that are in the collateral account. This could technically be any client of the entity deciding to convert euros into stablecoins or the like.

From a regulatory point of view, issuers of stablecoins fall under the regimes of Electronic Money Issuers in Europe, and Money Transmitters or Trust Company in the US.

In other words, from a functional and regulatory point of view, a stable euro coin is only a virtual representation of a currency in the same way as the flows managed by Paypal or Lydia for example. The real innovation of stablecoins is linked to the use of the blockchain: the balances of stablecoin users are not in centralized, private databases controlled by a single entity but are stored on “blockchains”, which makes them more efficient, more transparent and more secure.

The American example

Over $35bn is being traded as USD stablecoins today according to Messari . The first (and today still the biggest) stablecoin USD and the sulphurous Tether (USDT). Operating under a centralized model, doubts are high as to the exact value of the collateral behind UDST. Only 74% of USDT is backed by cash and cash equivalents, which does not prevent – ​​and this in a rather surprising and surely transitory way – more than $30bn per day of exchanges in USDT all over the world and especially in Asia . Several complaints have been filed by Tether users including one by the New York Attorney General .

In recent years, transparent and regulated initiatives have developed in the US around major players in the cryptocurrency community, including USD Coin and Paxos Standard. USD Coin (USDC) is a joint initiative of the two giants Coinbase     and Circle associated in the Center structure which issues this token and is regulated as a Money Transmitter (equivalent Payment Service Provider) in the US. Paxos Standard (PAX) is issued by Paxos , an entity regulated by the State of New York as a Trust Company (quasi-banking license) and active in particular via its subsidiary itBit in the trading of crypto currencies

Tether (USDT) USD Coin (USDC) Paxos Standard (PAX)
Transaction volume ($millions/day) $26,000 $267 $194
Total outstanding ($ millions) $4,700 $460 $207

Source: stablecoinindex.com as of November 26, 2019

For what use? 

Cryptocurrency _

Stable coins are now mainly used in the context of crypto-asset trading. Stablecoins like USDT, USDC, PAX offer sophisticated traders an alternative to traditional currency transfer rails (Swift, SEPA and other banking networks) – usually slow and expensive – allowing them to settle trades more easily or profit more arbitrage opportunities. Very interesting sign: the two “crypto-friendly” banks Signature Bank and Silvergate Bank in the United States both offer internal stablecoins to their customers , allowing them to make USD transfers 24/7.

Fintech _

A stablecoin is also a great innovation tool for Fintech startups. Indeed, today in Europe we cannot move money directly with software and code. With a few exceptions, banks do not provide any interface with their services, such as open APIs for example. This creates huge barriers to entry for innovators, who cannot easily manipulate currency flows as part of their services.

Payments 

From an institutional and retail point of view, a stablecoin allows transactions to flow smoothly (which take place 24/7 regardless of bank opening hours) and allows an overall reduction in counterparty risk. A stable euro coin would allow greater fluidity in the exchange of collateral in the context of financial transactions between two institutions – which is today the sinews of war for European banks – as well as a reduction in the risks and costs of transactions for a merchant (who would no longer have to “trust” the payment service used and could use the money received within the framework of his services immediately, and not after several days like today).

Conclusion: how to do? 

Creating a stable euro coin is good. Creating one that is used is better! At LGO , we see demand for a stable euro coin both from our customers but also from our partners. Creating a stable euro coin would create a lot of value for our network (and therefore for us) but also for the entire European ecosystem from day 1. We therefore believe that the best way to start is to satisfy existing uses: the trading of crypto assets and the development of the blockchain and fintech ecosystem in France because that is where the market is today. To be continued ?

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