Trump’s engagement with the crypto industry could pose challenges for Europe

 

Trump's reversal on crypto-assets, along with his selection of crypto-advocate JD Vance as his running mate, reintroduces a troubling scenario for EU policymakers.

Europe braces for an unprecedented Trump endorsement of one of the most feared technologies in policymaking circles: cryptocurrency.

On Thursday, proponents of this controversial technology will gather in Nashville for a three-day conference, where Trump is scheduled to appear. The presidential frontrunner is expected to offer significant policy concessions to the wealthy industry, which has been generously funding his campaign for months.

It's uncertain what Trump will promise to his new base, given his limited personal interest in crypto and past criticism of the technology during his presidency. However, any support from Trump, especially with his pro-crypto running mate JD Vance, is likely to cause unease in Brussels and Frankfurt.

For years, the European Union elite has sounded alarms over cryptocurrencies, digital assets that operate on blockchain technology, allowing transactions without financial authorities' mediation.

Regulation has been the primary tool for EU policymakers to manage the risks associated with cryptocurrencies, including volatility, money laundering, and Ponzi schemes. Their chief concern is that widespread adoption of these assets could undermine monetary and economic policy.

Particular attention has been paid to stablecoins, crypto tokens pegged to traditional currencies like the dollar and euro. Stablecoins facilitate seamless transitions between crypto and fiat currencies and are also used as parallel currencies. Their usage has surged in countries like Russia, where the dollar is hard to access, and in weaker economies, they have been linked to the decline of local currencies.

This trend alarms the European establishment. In 2019, policymakers panicked when Facebook (now Meta) announced its mega-stablecoin, Libra, fearing it could challenge the euro. In response, Brussels introduced the Markets in Crypto Assets (MiCA) regulation, imposing stringent requirements on crypto firms, effective from June. The European Central Bank also began exploring a "digital euro" to counter private currency competitors. Under pressure, Libra eventually faded.

However, a pro-crypto Trump administration could disrupt this uneasy balance. Industry insiders suggest that plans for similar tough regulations in the U.S. could be replaced with more favorable rules for stablecoins. New legislation might allow commercial banks to host and issue stablecoins or deregulate "crypto-native" stablecoin firms.

Such institutional support could lead to an explosion in stablecoin trading in the U.S. and Europe, mostly denominated in dollars. While euro-pegged stablecoins exist, they account for only 1.1 percent of crypto trades, compared to 90 percent for dollar-backed stablecoins.

"If the Trump factor leads to another crypto market boom, this will see more stablecoins in the EU, and these are predominantly pegged to the dollar," said a high-level European official. "European central banks and finance ministries indeed want to limit the presence of dollar-backed stablecoins in the EU, but there is little they can do to achieve this."

Leaky defenses

European regulators would struggle to contain the surge. Fabio Panetta, the Bank of Italy Governor and advocate for the digital euro, recently pointed out that MiCA does not stop users from accessing stablecoins on “untrustworthy” exchanges outside the EU. It also doesn't restrict EU-based stablecoin firms, such as the Boston-based and MiCA-regulated Circle, from issuing unlimited dollar-backed tokens for crypto trading.

Judith Arnal, a senior analyst at the Elcano Royal Institute in Madrid, observed that even MiCA can't prevent the use of a “super interesting stablecoin” designed for EU citizens.
“EU policymakers are rightfully concerned about currency substitution with the stablecoin acting as a vehicle to replace the euro with USD,” Nic Carter, a general partner at Castle Island Ventures and an influential industry veteran, told POLITICO.

“Stablecoins have become a bit of a financial weapon for the U.S.,” another well-connected lobbyist, who spoke anonymously about sensitive discussions, agreed. "They’re a powerful way to send dollars to places they wouldn’t normally reach.”
To be clear, the euro is a robust currency, unlikely to be easily overtaken by a crypto alternative. The world's second-largest reserve currency won't be easily usurped by a crypto contender, and European policymakers often exaggerate the crypto threat, perhaps envious of the perceived American innovation and growth.

“Europeans are committed to using the euro from a young age,” J.P. Koning, an economist who closely follows the stablecoin sector, explained. “That’s why the U.S. dollar hasn’t dominated the continent in its current forms, whether as a bank database IOU or a physical note.”

Currently, the stablecoin market is too small to pose a significant threat. The total value of crypto assets, including Bitcoin, remains under $2.5 trillion, according to Coingecko.com, less than 7% of the eurozone banking system’s assets, and down 16% from its 2021 peak.
Meanwhile, Trump remains a wildcard. Industry veterans like Carter suggest that Trump is unaware of the deep divisions within the crypto industry, and his support is seen more as a bid for campaign contributions than an ideological stance.

However, those in the know believe stablecoins will be a priority in Trump's policy proposals in Nashville.

Even if stablecoins aren't prioritized, Trump's endorsement, especially if followed by an electoral victory, could spark a global boom, increasing Europe’s exposure to frequent crypto meltdowns.

In a more radical scenario, two crypto advocates close to Trump's campaign suggested he might propose that the Treasury accumulate Bitcoin to back the dollar, a move that would have significant foreign exchange market implications.

While these risks are currently remote, a significant financial crisis in Europe could trigger a shift to a flourishing, U.S.-dominated crypto market. This could be exacerbated if crypto-asset values become “significantly inflated,” as one ECB official warned.

“In a crisis, only one will prevail,” agreed Karel Lannoo, CEO of the Center for European Policy Studies. "And it will be challenging for the euro to compete against the dollar.”