EU Central Banks Seek Change in Stablecoin Regulation

European Central Bank (ECB) and EU central banks want to replace mandatory thresholds for stablecoin reserves with new liquidity requirements, arguing that large stablecoin deposits could create liquidity risks for banks.

The European System of Central Banks (ESCB) has called for the removal of rules requiring at least 30 percent of reserves, or 60 percent for significant stablecoins, to be held as bank deposits. The proposal is in response to the ESCB’s review, published on Tuesday, of the Regulation on Markets in Crypto Assets (MiCA) by the European Commission.

Instead of the existing bank deposit rules, the ESCB has supported minimum liquidity thresholds for reserve assets maturing within one and five working days. The ESCB separately pointed to overnight repurchase agreements (repos) and short-term government bonds as alternative instruments that issuers can use to achieve liquidity.

The new proposal reflects concerns previously expressed by the stablecoin industry, including Tether’s CEO Paolo Ardoino, who has warned since 2024 that the requirements of MiCA for bank deposits could create systemic risks for both banks and stablecoin issuers.

EU Central Banks Prefer Liquidity Pools

The ESCB stated that the existing requirement creates a direct link between stablecoin issuers and credit institutions and could expose banks to liquidity problems if a rush of stablecoins forces issuers to quickly withdraw deposits.

Central banks referred to a draft rule published in 2024 by the European Banking Authority, which requires significant stablecoins to hold at least 40 percent of reserves in assets maturing within one working day, and 60 percent within five working days. For insignificant tokens, the thresholds are 20 and 30 percent, respectively.

In addition to stablecoin reserves, the ESCB also warned of ‘significant challenges’ in implementing MiCA, stating that crypto companies that do not comply with the law can still access clients from the EU.

Tether Expressed Similar Concerns in 2024

Tether’s CEO Ardoino illustrated the risk with a hypothetical stablecoin holding €10 billion in reserves, of which €6 billion would need to be held in bank deposits.

If a bank lent out 90 percent of those funds, he said, only €600 million would remain available, which could potentially create a liquidity crisis if the issuer suddenly needed billions for redemption, Ardoino stated.

Nearly two years later, the ESCB is now pointing to a similar risk, stating that a large influx could force the issuer to quickly withdraw deposits and create liquidity problems for the bank, especially if reserves constitute a significant portion of its funding.

Central banks stated on Tuesday that risks can also flow in the opposite direction, citing the collapse of Silicon Valley Bank in March 2023, which triggered a rush on Circle’s stablecoin USDC after Circle revealed that $3.3 billion of its reserves were held at the bank.

Following the ECB’s announcement, Tether’s Ardoino commented on X with a post.

– European central banks want Brussels to delete the MiCA rule on stablecoin reserves. It forces large issuers to hold 60 percent of that money in commercial banks. Tether rejected the EU license due to the same clause – Ardoino wrote.