In a recent statement, Paolo Ardoino, CEO of Tether, raised concerns over the European Union’s Markets in Crypto-Assets (MiCA) regulation, suggesting that it introduces significant systemic risks for both stablecoins and the EU’s banking system.
MiCA, which came into effect in June 2024, aims to standardize the regulatory framework for digital assets across the EU and establish strict reserve requirements for stablecoin issuers, mandating that they hold 60% of their reserves in European bank accounts.
According to Ardoino, this requirement not only places added pressure on stablecoin providers but could also destabilize banks reliant on a fractional reserve model.
His concerns are rooted in past incidents, such as the 2023 collapse of Silicon Valley Bank in the United States, where liquidity shortfalls exposed vulnerabilities within fractional reserve banking. In cases where stablecoin issuers hold substantial cash reserves in a bank, unexpected demands could create a “run on the bank” scenario.
He elaborated that, under MiCA’s rules, a single stablecoin issuer might be required to hold billions of dollars in EU banks. In a worst-case scenario, such a concentration of funds could trigger a liquidity crisis, impacting not just the stablecoin market but also the broader financial ecosystem.
Issues with Stablecoins
Stablecoins are a type of cryptocurrency designed to maintain a stable value by pegging to traditional assets, like the US dollar or the euro.
Unlike volatile cryptocurrencies such as Bitcoin, stablecoins use collateral reserves—often held in cash or equivalents—to provide stability, making them attractive for remittances, lending, and trading within the cryptocurrency market. Tether (USDT), for instance, is one of the largest stablecoins, with its value tied to the US dollar.
The EU’s MiCA legislation aims to regulate digital assets comprehensively and mitigate risks for investors and the financial system. By requiring that stablecoin issuers hold significant reserves within EU banks, MiCA seeks to increase transparency, security, and stability in the digital currency market.
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However, critics argue that the high reserve requirement could strain banks, which often operate on fractional reserves—a system that allows banks to lend out a majority of deposits while retaining only a fraction as liquid assets.
If stablecoin issuers suddenly need large cash withdrawals to meet redemption requests, banks could face liquidity shortfalls, potentially leading to widespread financial instability.
While MiCA’s reserve requirements intend to protect investors by ensuring stablecoin issuers have sufficient backing, Ardoino argues they may inadvertently place undue stress on the financial system.
This is particularly pertinent for large stablecoins like Tether, which have become integral to the global cryptocurrency market, with millions of users relying on their stability and liquidity.
Critics worry that MiCA’s reserve mandates could inadvertently create a bottleneck in the EU’s financial sector, leading to a situation where the very regulation meant to stabilize crypto-assets could contribute to volatility in the banking system.
