As a seasoned researcher with extensive experience in the crypto industry, I find myself deeply concerned about the upcoming MiCA framework and its potential impact on stablecoin issuers. With my background in finance and understanding of the intricacies of the crypto market, I can’t help but see the looming specter of systemic risks for stablecoins under this new regulation.
According to Paulo Ardoino, the impending regulatory structure in Europe may present substantial challenges for stablecoin issuers, potentially disrupting the overall stability within the cryptocurrency marketplace.
The extensive regulatory structure known as the Markets in Crypto-Assets Regulation (MiCA) will officially be enforced across the crypto sector starting December 30. This marks a significant step towards regulating the crypto industry.
According to MiCA regulations, stablecoin providers must maintain a reserve with no less than 60% of their assets deposited in European banks.
According to Tether’s CEO, Ardoino, there might be potential risks for stablecoin issuers if banks are able to lend up to 90% of their reserves, as this could lead to instability within the system due to the high leverage. This is especially relevant given that USDt (USDT), the world’s largest stablecoin with a market cap exceeding $120 billion, is issued by Tether.
Ardoino shared his concerns with CryptoMoon during an interview at Plan B Lugano in Switzerland:
“If you have 10 billion euros under management, you have to put 6 billion euros in cash deposits. That is 60% of 10 billion euros. We know that banks can lend out 90% of their balance sheet. So of the 6 billion euros, they lend out 5.4 billion euros to people […] 600 million euros will remain in the bank balance sheet.”
Certain significant entities responsible for issuing stablecoins have encountered banking challenges in the past. For instance, in March 2023, the US Dollar Coin (USDC) by Circle, one of the world’s largest stablecoins, briefly deviated from its dollar equivalence, dipping to $0.8774.
Following an instance where Circle was unable to retrieve $3.3 billion in reserves from Silicon Valley Bank – previously managing $40 billion for the stablecoin issuer – the bank ceased its operations, resulting in the depegging event.
MiCA: A step back for stablecoin stability, but there’s a silver lining for issuers
According to MiCA regulations, an increasing percentage of stablecoin reserves will be deposited in banks’ accounts. If a bank were to face bankruptcy, this could have substantial consequences due to the linked nature of these deposits. Ardoino pointed out:
“You deposit that 1 million euros in a bank account in Europe that has a federal deposit guarantee up to 100,000 euros. So the money you deposit in the bank is guaranteed to 100,000 euros if the bank fails and goes bankrupt, you get 100,000 euros and then everything else goes in the bankruptcy process because the money that you put in goes in the balance sheet of the bank.”
On the other hand, Ardoino explained that stablecoin issuers under the new MiCA framework can safeguard themselves from potential bankruptcy by utilizing the mechanism of securities.
“How you protect from that is you buy securities like T-bills or like government bonds or something like that. If the bank goes bankrupt and you have securities, the securities are nominal. So they will get back to you and you just move them to another bank.
Several major financial organizations are gearing up for the implementation of the MiCA regulatory framework, among them is Societe Generale, which ranks 19th globally in terms of banking assets. In collaboration with Bitpanda, they are planning to introduce a stablecoin that adheres to the MiCA guidelines, known as the Euro Convertible (EURCV).
Concerns are mounting over MiCA’s ramifications for smaller Web3 firms
Many industry experts, including Tether’s Ardoino, share concerns about the potential impacts of the MiCA framework.
Specialists in regulatory compliance voice worries that MiCA might trigger a mass migration of businesses towards the Middle East, potentially shrinking the count of European firms operating within the Web3 sector.
For smaller businesses with minimal financial resources, this consolidation raises significant apprehension, as stated by Anastasija Plotnikova, the CEO and co-founder of Fideum – a company that specializes in regulatory and blockchain infrastructure for institutions.
She told CryptoMoon:
“It will lead to a lot of consolidation. It will be a lot more predatorial, even VC practices or larger crypto companies just buying the talent, buying this off the shelf. But it is what it is.”
Cryptocurrency companies like Kraken exchange are gearing up for MiCA regulation, with Kraken recently purchasing the Netherlands’ oldest registered cryptocurrency broker company, Coin Meester, to further their growth in Europe.
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2024-10-28 13:03