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The US Republican presidential nominee, Donald Trump, delivered a keynote to crypto advocates at the Bitcoin 2024 conference. The former US President promised to make the United States “the crypto capital of the planet and bitcoin superpower of the world”.

Positioning himself as a contrast to the Biden administration and the Democratic nominee, Kamala Harris, Trump pledged to create a Bitcoin “strategic reserve” for the US government. He also vowed to dismiss Securities and Exchange Commission (SEC) Chair Gary Gensler if elected, and “appoint an SEC chair who will build the future, not block the future”. Last week, Trump became the first presidential candidate to accept crypto donations and raised $4 million (€3.69 million) in cryptocurrencies for his campaign.

While Trump’s backing of cryptocurrencies may appeal to voters who support digital tokens, the vigorous pro-crypto campaign could bring renewed regulatory risks to European policymakers. The monopolistic position of the USD-dominated digital tokens may also pose a threat to the world’s second-largest reserve fiat currency, the euro.

A resurgence in Cryptocurrencies

The crypto markets saw a resurgence this year, driven by the trajectory of central banks’ easing monetary policies. The Bitcoin halving event and the SEC’s approval of spot Bitcoin (Exchange Traded Funds) ETFs also sparked bullish momentum in these digital tokens. Since Biden withdrew from the presidential race earlier this month, Bitcoin has experienced a further rally due to growing speculation about a Trump victory in the November election. The largest cryptocurrency, Bitcoin, rose more than 13% from last month to more than $68,700 (€63,244) on Monday, just 6% short of its all-time high reached in March 2024.

Trump’s pledges at the Bitcoin 2024 conference on Saturday could serve as a catalyst for a further boom in crypto if he becomes the next President of the US. This potential shift may prompt European politicians to reassess the current regulatory regime.

The current regulatory regime of the EU

Over the past decade, cryptocurrencies and digital assets have seen significant growth in popularity and adoption. This rapid expansion has created a need for regulatory frameworks to ensure market stability, investor protection, and fraud prevention. The rise of Initial Coin Offerings (ICOs), security tokens, and stablecoins has highlighted both the potential for innovation and the associated risks within the financial system.

In September 2020, the European Commission presented the Digital Finance Package, aimed at ensuring the EU embraces digital finance while mitigating risks. The Markets in Crypto Assets (MiCA) regulation was introduced as part of this package to regulate cryptocurrencies and digital assets. However, MiCA has been adopted by the European Parliament and Council in stages and only came into force in June 2023, with partial application beginning in June and full implementation set for December of this year.

One significant risk posed by cryptocurrencies is their potential use for money laundering and terrorism financing due to the decentralised nature of transactions. Since Russia’s aggression towards Ukraine, cryptocurrencies have been used not only to support Ukraine but also to fund Russia’s military efforts. The Head of Sanctions at Chainalysis noted that: “Russian entities have turned to crypto under the heavy pressure of international sanctions, using it for private militia group fundraising, continued ransomware attacks, and attempted sanctions evasion.”

A potential threat to the euro

Some EU regulators are concerned that the dominance of USD-pegged stablecoins might pose a threat to the euro. Most stablecoins are pegged to the USD, which helps maintain their price stability over time. Crypto traders commonly hold stablecoins on exchanges as a medium for trading between different cryptocurrencies. This mirrors the dominance of the USD in commodity markets, where assets such as gold, silver, copper, and crude oil are also quoted in dollars.

However, to back these stablecoins, a crypto exchange or stablecoin firm must hold a corresponding amount of USD in reserve. As demand for stablecoins increases, it tends to bolster the USD while weakening the euro. A significant boost in Bitcoin’s prominence in the US would be likely to lead to a higher issuance of stablecoins, which could put additional pressure on other currencies, including the euro.