Europe seeks blockchain finance with euro at its core

Tokenisation is gradually gaining ground in conventional finance. As this shift occurs, Europe is posing a more straightforward query: what currency will be employed when everything operates on-chain?

The European Central Bank is already working on linking blockchain, tokenisation and conventional finance via initiatives like Pontes. The concept is fairly simple on the surface.

Consider a European government bond exchanged on a blockchain rather than via the existing financial infrastructure. The bond can be tokenised, enabling quicker settlement, reduced paperwork and fewer intermediaries.

Ultimately, someone must still purchase the bond. This is where the scenario becomes more intriguing.

Currently, stablecoins frequently serve as digital currency in the crypto market. If one wishes to acquire something on-chain, USDT or USDC are likely choices.

This presents a challenge for Europe's aspirations. The vast majority of major stablecoins are pegged to the US dollar. According to the ECB, dollar-denominated stablecoins constitute roughly 99% of the worldwide stablecoin supply.

Consequently, Europe might invest years constructing a modern financial system on blockchain, only to discover the currency flowing through it remains predominantly digital dollars. This situation is far from ideal from a European perspective.

That is why Pontes is not solely about accelerating blockchain settlement. It also enables banks to settle tokenised trades with central bank euros. In simpler terms, Europe aims to prevent the euro from being sidelined if conventional finance transitions to blockchain.

Nonetheless, stablecoins are not disappearing. They can still have a function. The key issue is what serves as the foundational, trusted ultimate money.

European bonds, funds and collateral can migrate to blockchain without needing Bitcoin, Ether or USDC for settlement. This indicates that blockchain adoption and crypto adoption are not synonymous.

Regardless of what happens, traditional finance could adopt the underlying crypto technology while preserving the familiar monetary system.

In that case, the crucial question shifts from whether finance moves on-chain to what currency will circulate through it.