The new European Markets in Crypto-Assets Regulation (MiCA) mandates that stablecoin issuers must hold at least 60% of their reserves in cash with European banks. While this regulation aims to enhance stablecoin safety for consumers, Tether CEO Paolo Ardoino argues that such requirements may, in fact, increase systemic risks within the financial sector.
MiCA: An Overview
MiCA is the European Union’s first comprehensive legislation targeting the regulation of crypto-assets, including stablecoins, to protect consumers and ensure market stability. Stablecoins are digital assets pegged one-to-one with traditional currencies like the euro or the dollar. Tether, the issuer of the widely used stablecoin USDT, has over $111 billion USDT in circulation, with reserves primarily invested in short-term U.S. Treasury bills—a secure and liquid option that earns interest and is easily accessible to meet customer withdrawals.
Risks of Bank Reserve Requirements
Ardoino claims that MiCA’s 60% cash requirement could unintentionally elevate risks. “For a stablecoin issuer managing €10 billion, MiCA would require €6 billion to be held as cash in banks. Given that banks typically lend out up to 90% of their deposits, this would mean lending out €5.4 billion, with only €600 million in liquid assets available,” Ardoino explains. In times of market volatility, a surge in redemption requests could strain liquidity and potentially lead to payout issues.
Another risk lies in the limited insurance on EU bank deposits, capped at €100,000 per depositor. If a bank fails, a stablecoin issuer may face years of delays to reclaim funds, as evidenced by the recent Silicon Valley Bank collapse. Circle, the issuer of the stablecoin USDC, had $3.3 billion, or approximately 8% of its reserves, with SVB. Following this news, USDC temporarily lost its peg to the dollar, sparking concerns among users.
Preference for Treasury Bills Over Bank Reserves
Ardoino advocates that investing in liquid assets like short-term Treasury bills is more stable than cash holdings with banks. Treasury bills remain outside bankruptcy procedures and can easily be transferred to another bank if necessary, allowing stablecoin issuers to remain agile and unaffected by the potential insolvency of a specific bank.
Tether Avoids MiCA License, While Circle Adapts
For now, Tether has chosen not to apply for a MiCA license, despite the potential benefits of enhanced market access in Europe. In contrast, Tether’s competitor Circle has applied for a MiCA license and plans to run its European operations from France. Circle issues the EURC stablecoin and also offers USDC to European customers; in the Netherlands, Bitvavo, for example, already offers ten USDC trading pairs.
MiCA introduces a standardized framework in the EU for stablecoin regulation, aiming to enhance consumer protection and financial stability. However, critics like Ardoino argue that the cash requirements are too stringent, which could add stress to banks and compromise liquidity during market downturns. Balancing stability and flexibility in this evolving landscape remains a complex challenge, with the industry closely watching to see if MiCA’s policies will require adjustments in response to market realities.
The Bigger Picture: Industry Concerns Over MiCA’s Cash Requirement
MiCA’s cash requirements reflect a cautious approach by European regulators toward cryptocurrency markets. However, this caution comes amid increasing scrutiny of the stability and systemic risks stablecoins may pose to broader financial markets. Ardoino’s comments underscore a common industry sentiment: as traditional financial institutions and crypto markets intertwine, regulatory structures must adapt to the unique liquidity dynamics of digital assets.
