EU Central Banks Want to Change Stablecoin Rules Over Bank Risks

Europe's top financial authorities are pushing to rewrite the rules for stablecoins (cryptocurrencies designed to always be worth the same as a normal currency, like the euro or dollar). They say the current rules could actually make banks less safe.

What's the problem?

Under the EU's crypto law called MiCA (Markets in Crypto-Assets Regulation — Europe's rulebook for digital money), companies that create stablecoins must keep a large chunk of their backup money in regular banks:

• At least 30% of reserves in bank deposits for normal stablecoins
• At least 60% for large, widely-used ("significant") stablecoins

The European Central Bank (ECB) — the institution that manages the euro — and other EU central banks now say this is risky. Here's why: if lots of people suddenly cash out their stablecoins at once (a "run"), the issuer would need to pull billions out of the bank immediately. But banks lend most deposits out, so the money might not be there — potentially causing the bank to fail.

What do they want instead?

Rather than forcing money into banks, they want liquidity rules — requirements that reserves be held in assets that can be quickly turned into cash. Suggested options include:

• Short-term government bonds (loans to governments that are easy to sell)
• Overnight repos (very short-term loans backed by safe assets)
• Reserves that mature (become available as cash) within 1 to 5 working days

A real example of the danger

In 2023, Silicon Valley Bank collapsed. The stablecoin USDC had $3.3 billion parked there, which sparked panic and a temporary crash in USDC's value — showing how banks and stablecoins can drag each other down.

Tether reacts

Paolo Ardoino, CEO of Tether (maker of the world's biggest stablecoin, USDT), had warned about this for years. He says his company even refused an EU license because of these very rules.

The bottom line: European regulators are admitting the current stablecoin rules may create the exact banking risks they were meant to prevent, and they want a safer approach.

This is an AI-generated summary. Read the original article at: https://cointelegraph.com/news/escb-new-stablecoin-liquidity-rules-bank-risks?utm_source=rss_feed&utm_medium=rss&utm_campaign=rss_partner_inbound