Tether CEO Paolo Ardoino warns that the impending Markets in Crypto-Assets (MiCA) laws, expected to drastically alter the cryptocurrency environment, may seriously jeopardize the EU’s banking system and stablecoin stability. MiCA, Europe’s first complete crypto regulatory framework, requires stablecoin issuers to maintain at least 60% of their reserve assets in European banks by December 30.
Stablecoin companies like Tether would have to maintain a sizeable sum of money in EU-based banks in order to comply with this requirement. Given the banking industry’s reliance on a fractional reserve model, which allows banks to lend out a significant portion of their deposits, Ardoino is concerned that this could potentially raise systemic issues.
Any unexpected demand for withdrawals could exert pressure on banks, potentially leading to financial instability, as stablecoins are required to maintain liquidity. Bank dependency difficulties have affected stablecoin providers in recent years. For example, Circle’s USDC stablecoin experienced liquidity issues in 2023 when it was unable to access reserves kept with a bank that closed, momentarily removing its peg to the dollar.
These circumstances underscore the potential risks MiCA could face if it concentrated stablecoin holdings in a limited number of EU banks. Ardoino notes that stablecoin issuers would have limited protection in the event of a liquidity crisis involving a bank holding these reserves, as the insurance would only cover a percentage of deposits. He says issuers might diversify into assets like government bonds, which are still available in the event of a bank failure, to reduce risks, but this might not completely solve the systemic risk.
Critics contend that while MiCA’s main objective is to increase security and transparency in the cryptocurrency space, the concentration of stablecoin reserves in EU banks may cause both stablecoins and conventional banks to become unstable during difficult financial times. For bigger stablecoins like Tether, on which millions of people rely for their consistent value in online transactions, this is particularly pertinent. The purpose of MiCA’s high reserve requirements for stablecoins is to safeguard investors by guaranteeing that these assets have adequate backing.
But according to some industry experts, the rules could unintentionally put the financial system under stress by reducing bank liquidity and possibly igniting volatility in the case of large-scale redemptions. As the December deadline draws near, financial institutions and cryptocurrency companies are getting ready for how MiCA will affect the market and their business operations, managing the potential advantages and disadvantages of Europe’s new crypto framework.
