Europe’s incoming regulatory framework may bring challenges to stablecoin issuers, potentially affecting the stability of the wider cryptocurrency industry, warns Tether’s CEO, Paolo Ardoino.
The Markets in Crypto-Assets Regulation (MiCA) is set to become the first comprehensive crypto regulatory framework within the EU, taking full effect on 30th December. Among its requirements, stablecoin issuers will need to maintain at least 60% of their reserve assets within European banks. This stipulation, however, could introduce what Ardoino calls “systemic risks,” as banks typically lend up to 90% of their reserves. Such practices, he argues, could place significant amounts of stablecoin reserves at risk if banks face financial instability.
In an interview at the Plan B Lugano event in Switzerland, Ardoino elaborated on these concerns, using Tether’s $120 billion USDt as an example. He explained that stablecoin issuers required to keep €6 billion in cash deposits for a €10 billion asset base would expose most of this amount to bank lending cycles, with only a small percentage safeguarded within the banks’ balance sheets.
Stablecoin issuers have previously encountered banking issues, with Circle’s USD Coin experiencing a temporary depegging incident in March 2023. This occurred when Circle could not access $3.3 billion of its reserves due to the sudden closure of Silicon Valley Bank. The enforced bank reserve structure under MiCA could further amplify these risks, particularly if European banks face economic turbulence. As Ardoino notes, typical federal deposit guarantees within the EU only cover €100,000 per depositor, leaving large portions of stablecoin assets vulnerable in a bank failure scenario.
To mitigate such risks, Ardoino suggests that stablecoin issuers could diversify their holdings into safer securities, such as government bonds or treasury bills, offering a degree of protection from banking instability. Nonetheless, with more stablecoin assets tied to bank balance sheets, the framework could lead to a higher concentration of risk within the financial sector.
This regulatory shift is also raising broader concerns among industry leaders. MiCA’s stringent requirements may push some European Web3 companies and talent towards jurisdictions with friendlier regulatory climates, like the Middle East. Anastasija Plotnikova, CEO of regulatory advisory firm Fideum, believes MiCA could accelerate consolidation within the industry, potentially leading to larger firms absorbing smaller competitors and their talent.
In anticipation of MiCA, crypto firms such as Kraken are already adapting their strategies for compliance. Kraken recently acquired Coin Meester, the Netherlands’ oldest registered crypto broker, as part of its expansion within Europe. Meanwhile, major financial institutions, including Societe Generale, have also taken proactive steps, launching MiCA-compliant stablecoins like the EUR CoinVertible.
As MiCA’s full implementation approaches, European crypto and financial institutions face the challenge of balancing regulatory compliance with innovation, an endeavour that will shape the sector’s future within the EU and beyond.