The European Union’s Markets in Crypto-Assets Regulation (MiCA) is set to introduce significant banking reserve requirements for stablecoin issuers, stirring industry concerns over potential risks to financial stability. These new rules, effective December 30, are the first comprehensive regulatory framework targeting the cryptocurrency sector across Europe.
Banking Reserve Rules and Systemic Risks for Stablecoins
MiCA mandates that stablecoin issuers maintain at least 60% of their reserves in European banks. Tether’s CEO, Paolo Ardoino, voiced concerns over this stipulation, suggesting it could introduce “systemic risks” due to the lending practices of banks. Banks can loan up to 90% of their reserves, meaning much of the stablecoin issuer’s reserve might be inaccessible in the event of a bank failure.
For Tether’s USDt, the world’s largest stablecoin, with a market cap surpassing $120 billion, the implication is that a substantial portion of these funds would be tied up within the banking system, with limited liquidity. “If you have 10 billion euros, 6 billion must be held in cash deposits, but of this, 5.4 billion could be loaned out,” Ardoino explained, noting that only 600 million euros would remain directly available.
Past Challenges for Stablecoin Issuers Highlight Potential MiCA Risks
Stablecoin issuers have previously encountered banking difficulties that affected their stability. In March 2023, Circle’s USD Coin (USDC), the world’s second-largest stablecoin, briefly lost its dollar peg, dropping as low as $0.8774. This depegging occurred when Circle was unable to access $3.3 billion in reserves held with Silicon Valley Bank, which had failed abruptly.
Ardoino warns that similar situations could arise under MiCA if stablecoin reserves are heavily exposed to bank balance sheets. Deposits in European banks are only federally insured up to 100,000 euros, meaning stablecoin issuers could face considerable risk if a bank failure occurs.
Safeguards for Stablecoin Issuers: Securities as a Hedge Against Bank Failures
Despite these concerns, Ardoino notes that stablecoin issuers can mitigate some of these risks by investing in government-backed securities, such as Treasury bills. In the case of a bank collapse, these securities would remain nominal and transferable to other financial institutions, providing a degree of financial stability.
Major financial institutions, like Societe Generale, are already preparing for the MiCA rules. In collaboration with Bitpanda, the bank is launching a MiCA-compliant stablecoin, EUR CoinVertible (EURCV), denominated in euros.
Implications of MiCA on Smaller Web3 Companies
The impact of MiCA may be particularly challenging for smaller Web3 firms, as the costs and complexities of regulatory compliance could drive many to shift operations outside Europe. Anastasija Plotnikova, CEO of Fideum, highlights concerns that MiCA could lead to market consolidation, with larger players acquiring smaller firms to absorb their talent and technology. This consolidation may favor wealthier companies, leaving smaller firms struggling under increased regulatory burdens.
Industry Prepares for MiCA’s Impact
In preparation for MiCA, several crypto firms, including Kraken, have made strategic moves to expand within Europe under the new regulatory landscape. Kraken recently acquired Coin Meester, the oldest registered crypto broker in the Netherlands, as part of its commitment to comply with European standards.
As MiCA approaches, stablecoin issuers and Web3 companies alike are navigating a new regulatory era that promises to reshape Europe’s crypto landscape, for better or for worse.
