Could foreign exchange markets (forex) end up on the digital rails?
At the moment, cryptocurrency markets are a long way from supporting anything close to the $6 trillion-plus a day that changes hands every day in traditional foreign exchange.
But glimpses of recent growth in euro-backed stablecoins have some token issuers thinking of a future where digital versions of national currencies easily flow on blockchain-based markets between cryptocurrency exchanges and the fast-developing trading and lending platforms of decentralized finance (DeFi).
“It’s hard to go a day without hearing someone within blockchain saying they wish there was a euro stablecoin,” Michael Richards, a member from Astral Money, a European market-focused crypto project powered by blockchain protocol Terra, said in an email to CoinDesk.
The circulating supply of euro-pegged stablecoin EURS token has more than doubled this year to nearly 80 million from just about 30 million, based on data from Glassnode.
EURS – which Stasis, its issuer, says is the oldest euro stablecoin project – features a token built on Ethereum’s ERC-20 standard claiming to be backed 1:1 by euros in the issuer’s accounts. The market capitalization of EURS sits at about $96 million.
But the ambitions are grand.
Forex is by far the largest financial market in the world, according to Investopedia, where trades take place on an over-the-counter (OTC) marketplace. It is also considered more opaque than other traditional financial markets, and large institutions tend to play a significant role in determining prices.
“One of my biggest hopes for the crypto market is to disintermediate this forex market going forward because it’s one of the most untransparent and shady markets left in the whole financial market space,” Gregory Klumov, CEO and founder of Stasis, said. “There is no single exchange where say EUR/USD is traded.”
According to Klumov, interest in euro-backed stablecoins – just as with U.S. dollar-pegged versions – took off last year as more institutional investors from traditional finance entered the crypto market.
“There has been an anti-dollar narrative, which started last year after the United States started spending money like crazy, giving stimulus checks and all the rest of the anti-dollar measures,” Klumov said. That turned “attention to the second-biggest currency after the dollar, the euro.”
The sharp growth of EURS since the beginning of this year in particular can be attributed to “a lagging penetration of crypto in general across Europe” compared with the U.S. or Asia, Klumov said.
In June, Switzerland’s Sygnum Bank announced the launch of custody and trading services for a range of DeFi tokens, including aave, aragon, curve, maker, synthetic and uniswap. It also started helping institutional clients get staking rewards from Ethereum 2.0.
“I think once the EUR-denominated DeFi springs up, there’ll be a lot of people looking towards automation to take advantage of the forex opportunities rather than seeing shifts as a risk,” Richards said. “This is very much probably going to be a good early move for TradFi (traditional finance).”
On the popular DeFi protocol Synthetix, which creates on-chain synthetic assets that track the value of real-world assets, synth sEUR (SEUR) is the No. 4 synthetic asset by market capitalization, just behind Synthetix’s own token Synthetix (SNX), synth sETH (SETH) and Synth sUSD (SUSD), according to data from DeFi Market Cap. Synth sEUR also contributes to 20% of Synthetix’s total debt pool for synthetic assets, behind only sUSD’s 34% and sETH’s 30%.