Global Leader or Financial Colony?
Europe Must Choose

The Trump administration’s economic policies are creating a major opening for the global comeback of European finance… at least theoretically. With every passing day, investors are increasingly asking themselves whether it still makes sense to believe in the mighty US dollar. For those losing faith, one obvious replacement should be the euro. After all, it is already the second largest reserve currency, while Europe is the second largest financial market in the world.

However, there is a glitch. When it comes to the future of finance, Europe is currently an American colony. Financial services are going crypto — and not in the sense of investing in crypto assets such as Bitcoin. Although major fund managers and even banks are indeed increasingly holding digital assets, the real seismic shift is the move of the financial products and services onto blockchain or onchain. This trend is inevitable in the same way that the complete takeover by the internet of the service industries that rely on information became unavoidable once this technology matured sufficiently.

Just like the internet is a much better technology for storing and moving information, blockchain is a much better technology for storing and moving financial value than anything we’ve ever had. Sure, most of the main crypto “use cases” until now could indeed be summed up as crypto for crypto’s sake, the biggest one of them being speculative trading of crypto coins that have no intrinsic value (traditionally referred to in the crypto jargon as “shitcoins”.) But don’t be fooled by the current shitcoin era. Remember the early 1990s, when the internet use cases were basically limited to US university websites and free porn? It was then equally hard to believe those economists who claimed that the internet was going to drive a massive productivity revolution. We are now exiting the blockchain equivalent of that era. And things are going to get very disruptive, very fast. From payments to securities, most of the financial services will soon be run at least partially on the blockchain.

The glitch is that today’s global blockchain economy is fully dollarized. In order to be able to process financial services on chain, you need a blockchain version of the currency in which the service is denominated, which is called a “stablecoin.” A stablecoin’s value remains equivalent to the value of its underlying currency. As the basic settlement instrument, stablecoins will be the basic building block of the future of finance. They are already a powerful technology. Sending money from a bank account in Europe to a bank across the Atlantic using infrastructure running on stablecoins takes minutes rather than days that it takes with the current banking systems. As this technology is now reaching maturity, stablecoins are currently all the rage in the payment industry, with many major payment companies investing billions in this space. Private companies that build and manage them have already issued hundreds of billions worth of stablecoins. Since every stablecoin has to be backed by an equivalent amount of real money, this means that there are hundreds of billions of dollars, about 220 billion to be precise, invested in stablecoins today. I say dollars because today’s entire stablecoin market is dollar-denominated. Non-dollar stablecoins currently amount to approximately 0.1% of this market.

Since most of the major innovations in finance will almost certainly be taking place on chain, without a strong stablecoin industry, Europe will be relegated to a second, or more likely third, league player in global finance. The early days of the internet should be a warning to European policymakers. The initial killer app of the internet was the search engine and here Europe totally lost to the US. Without any relevant contestants in this space, Europe was never able to catch up, let alone compete with the American internet-based tech giants.

Catching up on on-chain finance won’t be easy. Not only do dollar stablecoins have a huge head start, but the current Trump administration is aggressively embracing crypto to ensure that the future of finance will remain dominated by the dollar. Even the Eurozone finance ministers are starting to realize the potential danger.

The Eurogroup discussed US cryptocurrency developments during its meeting on March 11, after which its chairman, Paschal Donohou, told journalists that “these discussions are fundamentally linked to our own autonomy and to the resilience of our currency.”

However, the ministers drew exactly the wrong conclusions. While the current US government is set to prohibit a potential government competition to stablecoins in the form of Central Bank Digital Currencies (CBDCs), the European finance ministers concluded that the best way to compete with the Americans was through the creation of a digital euro by the European Central Bank. This would be equivalent to trying to catch up with the Yahoos and Googles of the late 1990s with a European search engine built and run by a ministry of education. CBDCs can play a useful role in financial services, but real innovations always come from startups that drive practical applications of novel technologies.

Despite today’s massive lag, Europe can still catch up. Fintech has actually been one of the very few domains where European tech companies have been able to compete with and even outperform their American peers. This is also true of major crypto companies and projects, including Ethereum, which was launched in Switzerland. And Europe is still the largest crypto economy in the world. Last but not least, the EU crypto industry has enjoyed much more progressive regulators and a favorable regulatory environment than the US. But if the European and euro-denominated finance is to benefit from the historic opportunity offered to it by the Trump administration, European politicians need to resist their usual impulses and immediately start working closely with rather than trying to become the captains of an emerging industry.