In a recent statement, Tether CEO Paolo Ardoino expressed concern about the European Union’s Market for Cryptocurrency (MiCA) regulation, saying it could have significant implications for both stablecoins and the EU’s banking system. suggested that it poses a systemic risk.
MiCA, which came into force in June 2024, standardizes the regulatory framework for digital assets across the EU and imposes strict reserve requirements on stablecoin issuers, requiring them to hold 60% of their reserves in European bank accounts. It is intended to be mandatory.
According to Ardoino, this requirement not only puts additional pressure on stablecoin providers, but also has the potential to destabilize banks that rely on fractional reserve models.
His concerns are rooted in past events, such as the Silicon Valley bank failure in 2023, when a lack of liquidity exposed the vulnerabilities of fractional reserve banking. If a stablecoin issuer has large amounts of cash in the bank, unexpected demand can lead to a “run on” scenario.
He elaborated that under MiCA rules, a single stablecoin issuer could be required to hold billions of dollars in EU banks. In the worst-case scenario, such a concentration of funds could trigger a liquidity crisis, impacting not only the stablecoin market but the broader financial ecosystem.
stablecoin problem
Stablecoins are a type of cryptocurrency designed to maintain stable value by being pegged to traditional assets such as the US dollar or the euro.
Unlike unstable cryptocurrencies such as Bitcoin, stablecoins provide stability through the use of collateral reserves, often held in cash or equivalent, making it difficult to transfer money within the cryptocurrency market. , making it attractive for financing and trading. For example, Tether (USDT) is one of the largest stablecoins and its value is pegged to the US dollar.
The EU’s MiCA bill aims to comprehensively regulate digital assets and reduce risks for investors and the financial system. MiCA aims to improve the transparency, safety and stability of digital currency markets by requiring stablecoin issuers to hold significant reserves within EU banks.
Also read: EU regulator prompts MiCA cryptographic framework update
But critics argue that high reserve requirements could put a strain on banks. Banks often operate on fractional reserves, a system that allows banks to lend out a large portion of their deposits while keeping only a large portion of them as liquid assets.
If stablecoin issuers suddenly need to withdraw large amounts of cash to meet redemption requests, banks could face a liquidity crunch, potentially leading to widespread financial instability.
MiCA’s reserve requirements are intended to protect investors by ensuring sufficient support for stablecoin issuers, but could inadvertently put undue stress on the financial system, Ardoino said. he claims.
This is especially true for large-scale stablecoins like Tether, which have become integral to the global cryptocurrency market. Millions of users rely on its stability and liquidity.
Critics argue that MiCA’s reserve obligations unintentionally create bottlenecks in the EU’s financial sector, a situation in which regulations aimed at stabilizing crypto assets could themselves contribute to instability in the banking system. I am concerned that this may lead to
