We are occasionally asked what the difference is between our Digital Euro and Circle’s Euro Stablecoin. In this journal article, a brief differentiation will take place and the essential differences will be worked out and pointed out.
With the acronym “EUROC”, the US company Circle announced and published the counterpart to the US dollar stablecoin USDC in the summer of 2022.
The following can be read in the press about the EUROC: “the Euro Coin [will] be regulated as a stablecoin and fully covered by reserves in the form of euros. Accordingly, each unit of EUROC currency would be backed by a corresponding euro in Circle’s reserves, which in turn will be held in custody in the United States. Initially, Silvergate Bank, a bank known for its dealings with the crypto industry, is indicated as the primary custodian of the new euro stablecoin. The stablecoin will be located on the Ethereum blockchain as an ERC-20 token.”
At the same time, not all stablecoins are the same, it always depends on the underlying values that were deposited as collateral to represent the actual value of the token. In this context, the so-called “backing”.
Circle, unlike Digital Cash, is not tokenized cash held in high-security vaults, but tokenized bank or giro money held by the US-based Silvergate Bank. The following chart shows the latest audit report of the deposits (“Cash Deposits”):
Source: EUROC Reserve Report / WP-Bericht von Grant Thornton, New York, September 23, 2022 URL: https://6778953.fs1.hubspotusercontent-na1.net/hubfs/6778953/Euro%20Coin%20Attestations/EUROC%202022_Circle%20Examination%20Report%
“Cash held at U.S. regulated financial institutions” refers exclusively to “Silvergate Bank” in footnote 8.
The deposit of $76,489,291 legally represents a receivable from Circle to Silvergate Bank. This is the case with all deposits, the customer deposits the money with the bank and has a receivable, the bank accounts for this accordingly as a liability.
Consequently, the EUROC is subject to the risk of default by the custodian. Deposit insurance here suggests a security that cannot be held in case of doubt – at the latest since the 2008 financial crisis, it has been clear that not all large banks are necessarily “rescued” safely, even if they are “systemically relevant”, as the bankruptcy of Lehman Brothers showed.
Since, in today’s fractional reserve banking system, money can be multiplied almost arbitrarily via money creation in the form of lending while maintaining a reserve of 0.0 percent at the Fed (and 1.0 percent at the ECB), the EUROC is an unbacked stablecoin, provided that it is based only on book money. Even if further assets such as European government bonds are held as an underlying, these may also be subject to the default risk of the custodian, in addition to the fundamental default risk of the issuer – remember the debt cut (“haircut”) of Greece in the euro debt crisis in 2012.
Of course, this variant and this unsecured approach also has significant advantages: with any interest income, Circle can cover all costs and generate revenue. In addition, the expansive, uncomplicated money creation enables rapid scalability.
The EUROC project is positive in bridging the gap to a safe and scalable DeFi space.
From a Digital Cash perspective, we welcome new Euro stablecoin projects as we believe there is currently far too much US Dollar exposure in the DeFi space. While globally about 40 percent of all SWIFT payments are made in euros, the euro is effectively absent from the decentralized finance space. This is something we wish to change and EUROC is a good scaling project to change this. In addition, the project is planned to roll out on multiple blockchains and is supported today by two wallet providers (MetaMask and Ledger) and multiple custodians.
Circle is transparent with the underlying token money and clearly references the specific underlying associated with that token – unlike competitor Tether, which was subject to two penalties totaling $42.5 million by the CFTC in October 2021 because only 27.6 percent of the U.S. dollar tokens issued were verifiably backed. We consider this transparency from Circle to be both necessary and beneficial. It is thus up to each user to weigh and take the specific default risk associated with the EUROC.
Tokenized cash combines the positive features of cash and cryptocurrencies. One has the physical security of the bill without it being encumbered by third-party claims. This is the case, for example, with bank or giro money, since the owner is always exposed to the risk of default by a central party, namely the bank. At the same time, as the owner, I can carry out transactions worldwide in a few seconds, and the costs for this are considerably lower than the costs of a comparable fiat transaction due to the correspondent banks involved.
One uses the “digital twin” – the banknote itself remains in a safe place in the vault and I as the user can still use it as liquidity and trade with it, for example.
There is no longer any need for a separate safe for the cash; instead, I always have my cash with me in digital form. Of course, there are also associated disadvantages; the cash has to be stored, which involves considerable logistical requirements and costs. These costs are borne by Digital Cash as part of the business model, so holding the Euro Token is and remains free of charge for the user.