The Policy & Technical team has seen a growing interest by ACT members in the area of digital assets, and particularly stablecoins.
In response to this, a member of the team attended the European Blockchain Convention to learn more about the current state of play.
Overall reflections
The convention was busy. Apparently, it is 30% busier than 2024. This seems a proxy for a general increase in the investment being made in this sector and the number of startups emerging. The delegates were very diverse – all ages and a strong presence of women. They also were a mix of those from the “tradfi” as well as those from the new digital ecosystem. Most of the people I met were keen advocates of digital assets, so it was a great opportunity to learn from a knowledgeable community.
One thing I did not expect was the number of people who saw aspects of digital assets as a way of moving “off-grid” and away from potential surveillance from governments or big business. For many of these, the attractiveness of cryptocurrencies such as Bitcoin was the ability to transact without interference from any governmental authorities.
There was almost universal agreement that for the whole digital assets space to grow, it needed the participation of the corporate treasury community. The ability to transfer funds cross border 24/7 365 days of the year, at low cost almost instantaneously is what makes cryptocurrencies an attractive proposition for those offering solutions to corporates (though corporates need to identify whether this is a useful functionality for their business). Market proponents are keen to see increasing participation by businesses as increasing the sources of liquidity into this market will create a deeper and more liquid environment and reduce some of the current perceived problems faced. It will also accelerate the development of a robust legal infrastructure.
One of the concerns raised by the audience was the potential impact that stablecoins could have on the robustness of the existing financial system. We do not know what the actual impact could be, but concerns raised include:
• Speed with which money could flow of out the traditional banking system – perhaps putting those banks into a liquidity crisis
• Reducing the level of credit available from the banks which would reduce credit lines or make them more expensive
• Greater difficulty for monetary authorities to understand the inflationary drivers in an economy using traditional models
It is easy to highlight what is wrong with the current way in which most financial transactions are settled but, from conversations with treasurers, it feels that the technical capability is only one part of the ecosystem that needs to be addressed before they become more mainstream.
One thing that did stand out for me was the point that we should not use digital assets to replicate the traditional financial ecosystem. If we wish to fully unlock its potential, we must re-imagine how finance should work. This could include concepts such as embedded payments and embedded finance and other emerging tools.
Stablecoins
A number of sessions covered stablecoins and panels included established banks, regulators and lawyers as well as large FIs such as VISA and Stripe. It was evidence of how many of the established “tradfi” institutions are building connectivity into the digital asset space as well as creating their own cryptocurrencies. Swiss and Luxembourg banks and regulators in particular demonstrated how fast some European countries are engaging in this area.
Several sessions addressed the value of stablecoins in supporting atomic settlement, whereby payment is only made in the event of settlement of a corresponding transaction. Traditionally, banks and other financial institutions enable companies to settle transactions with those they may not fully trust. However, using a financial institution carries a cost for the trust provided and the sometimes complex arrangements that are involved. Atomic settlement reduces settlement risk and consequently how long counterparty risks can last. In its purest sense, it could eliminate counterparty risk as settlement would not occur unless the counterparties were legally capable of discharging their obligations. Atomic settlement has the potential to disintermediate the banks and other financial institutions (such as exchanges) with a wide range of positive outcomes for treasurers and their businesses.
Banks are not sitting back with:
• A group of European banks joining together in a consortium to create a euro stablecoin
• 10 major banks including Bank of America and UBS jointly exploring issuing a stablecoin.
However, like fiat money, it is not expected that all stablecoins will be equal. Acceptance levels, interoperability, pricing, controls, regulations – all will affect the choice of which stablecoin will be used.
Tokenised deposits
Tokenised deposits have come a long way in a relatively short period of time, and this reflects the ,more straightforward regulatory environment for them compared to stablecoins and other digital assets. They are much more clearly identifiable as an asset class compared with the settlement nature of stablecoins. Available from well capitalised and regulated entities, they are a product already covered under most existing regulations in mature jurisdictions. They are considered by the financial services industry as a product that it is easier for corporate treasurers to understand and get approval to proceed. However, tokenised deposits are not cheap to establish and treasurers will need to work with the industry to make sure that there are enough useful use cases to enable the market to grow.
Regulations and standards
Clear legal and regulatory frameworks are emerging. However, there is limited global coordination with the countries like the UAE and Singapore taking different approaches to the EU and the US.
A number of panellists compared the Genius Act in the US and MiCA in the EU. It was felt that the US legislation was clearer but provided less consumer protection whereas MiCA had more consumer protection and accepted a broader range of assets to collateralise the issue of stablecoins. There was concern that this would make it harder for fintechs to enter the EU market than the US. Further disadvantaging euro entrants was the level of scrutiny by regulators of the larger economies (such as France and Germany). Investors have limited appetite for long engagement processes and prefer the speed of authorisation from countries such as Malta and Cyprus.
Final Thoughts
Some random comments that I picked up from the numerous conversations I had during the conference:
• Tokens that restrict which countries and even companies they can be used for, could eliminate AML risks for certain types of transactions
• Innovation is not risk free and the EU needs to change its mindset and focus on the opportunity of digital assets
• US dollar stablecoins provide greater demand for US treasuries which mitigates some of the challenges with funding the US deficit
• One asset manager working out of Scandinavia has never had a week of net outflows of digital assets despite the volatility of the assets – in her view, demonstrating the long term value appeal of such assets
• Traditional asset managers are starting to partner with bitcoin miners
• Different stablecoins could be used for different payment corridors
• Asian businesses and family offices are more interested in blockchain technologies. The US is growing in interest whilst in Europe, interest is still muted.
• Banks need to decide what role they want to play – an all-inclusive provider or an expert in just one space that orchestrates other players.
