liquidity, let's now understand how this can change the foreign exchange market.
Nowadays, we have several stablecoins pegged to the dollar on public blockchains. This is great when we want to exchange more unstable tokens, like $BTC or $ETH , for something more stable that represents a fiat currency. But, if the idea is to perform exchange operations on DEX, it is essential to have representations of other currencies in this space.
Today this is one of the bottlenecks we still face. The second fiat currency, the euro, has very few initiatives and none with much traction. The first, in terms of issued tokens, is the Stasis Euro (EURS) with an issued value around USD 125 million, compared to over USD 60 and USD 40 billion issued of USDT and USDC, respectively. Although the issued value is a parameter, the best thing to look at here is liquidity, since even with small issued values, there can be a market where this asset circulates numerous times the issued value daily. This is also not the case. The traded volume of EURS hovers around USD 2 million per day, while USDC is around USD 4 billion.
Another euro stablecoin is EUROC, which started being issued by Circle, the issuer of USDC, in mid-2022, but which, up to the moment I am writing, has a very small volume.
If we were to compare with the global spot foreign exchange market, we should have the euro volume in this market of approximately 1/3 of the dollar volume. That is, there is a lot of room to grow. The reason for this may stem from the fact that stablecoins are still not regulated and, therefore, cannot participate in most foreign exchange operations that involve exchanges of services and products. Once again, the highlight here was on the 'still' in the last sentence, and I believe I will make this observation several other times. When it comes to digital economy, everything is a matter of time to consolidate or be implemented.
Note that we are only discussing the second largest currency in the world, the euro. When we look at smaller currencies, like Brazil's real, the issued and traded values are extremely low, whether analyzed individually or in comparison with the representativeness of BRL in the spot exchange market.
One of the factors that may be influencing is the credit risk of the issuer. Perhaps 'credit risk' is not the most appropriate terminology, but it illustrates the idea well. I refer to the risk that stablecoins of a certain currency do not have the necessary backing to maintain the 1:1 ratio. Since most initiatives are centralized and have connections to the traditional market, that is, off-chain, validating their reserves becomes a challenge. The lack of clear regulation for many of them complicates the scenario even further. Of course, this affects more those who choose to hold these currencies in their wallets than those who use them only for exchange, but it is still a point of attention.
From the initiatives I have been following, Circle, which has the participation of Coinbase and is the issuer of USDC and EURC, seems to be more aligned with regulators and the emerging legal requirements for this market. In a report from Circle analyzing the years 2018 to 2022 of USDC, some data caught my attention. For example, more than 70% of USDCs are not on exchanges, and more than 15% of USDC transactions occur between individual wallets. This suggests that USDC may be used for transactions related to products or services in the offline market.
But, summarizing this first part, we observe that, except for dollar stablecoins, the others still have a timid participation in the crypto universe.
Regarding the trading location, we already have a well-established environment. Whether through centralized exchanges (CEX) or decentralized exchanges (DEX), we have token and stablecoin trading platforms moving billions. It is worth mentioning that, in the case of CEX, there is a risk of situations like the one that occurred with FTX, one of the largest CEX in the crypto market, which went bankrupt at the end of 2022.
However, if the idea is to use these platforms only for trading, this risk is minimized. Some CEX are developing non-custodial trading systems, allowing the trading of assets without the need to transfer them to the custody of the exchange, which minimizes this risk.
An academic study from early 2023, which analyzed the exchanges between USDC and EURC on a DEX (Uniswap) during the last quarter of 2022, stood out to me. Although the trading volume is still modest, the correlation between the exchange rates of the stablecoin market and their fiat counterparts was significant. This is where all the advantages of blockchain come in: 24/7 operation, disintermediation, automatic settlement, recording and tracking, total transparency in prices, and, best of all, nearly zero costs. Comparing a traditional foreign exchange transaction with one via stablecoins and DEX, costs can be drastically reduced.
What I perceive when analyzing studies like this is that we are no longer talking about an experimental market, but rather a market entering its exponential phase. The regulation of these stablecoins, possibly based on American legislation, is coming at a gallop. Singapore has already taken the lead, with its Monetary Authority (MAS) publishing guidelines for stablecoin issuances in August 2023, and it is expected that the implementation of MiCa (Markets In Crypto Assets Regulation), the European regulation that also started in 2023, will bring significant boosts to this market.
The discussion about CBDCs may accelerate or slow down this process, as, in a way, stablecoins and CBDCs compete in this environment. The advantage of CBDCs is that, being issued by the Central Bank, they do not need to prove reserves.
Despite this possibility, I wouldn't bet much on it. The models that seem more promising currently combine wholesale CBDCs and retail stablecoins, like the one proposed for Drex. In this model, everyone would have a stablecoin regulated by the Central Bank. Where and how this stablecoin can be transacted are crucial questions, as they involve privacy, exchange, and all the KYC and anti-money laundering regulations, but this is a topic for us to address later.
In summary, regarding exchange, if we have two stablecoins or CBDCs listed on a certain blockchain, this already allows exchanges between these two tokens, representing an exchange operation. With stablecoins and DEX, we would have more transparent, cheaper, automated, and 24/7 available operations. The technical capacity for this already exists, but we still need regulation. I see this as a matter of time, especially with projects like BCB's Drex, which is born compatible with EVM and can therefore import a large part of these protocols and DeFi functionalities to its network.
Will we exchange via stablecoins and DEX on a non-permissioned public blockchain or one controlled by the government, like BCB's Drex? I believe we will do both. DeFi will always run on public blockchains that will continue to innovate and challenge regulators to step out of their comfort zone.
