Circle Seeks EU Stablecoin Reserve Rule Rewrite

Circle, the issuer of the USDC stablecoin, has requested that the European Union's 30% reserve rule for stablecoins be replaced with a liquidity-based standard. The company made this proposal in an October 1 response to the European Commission's MiCA consultation. Circle argues that the current fixed bank-deposit minimums do more harm than good, pushing issuers deeper into banks' credit and counterparty risk.

The European System of Central Banks shares Circle's skepticism about fixed deposit minimums but proposes a different fix. They recommend removing the hard deposit floors and instead requiring a minimum share of reserves to mature within one to five working days. However, their reasoning diverges sharply from Circle's on diversification, as they warn that a sudden run on a stablecoin could force an issuer to pull deposits out of its banking partners, transmitting financial stress directly into the banking system.

Circle also wants the European Union to eliminate two concentration thresholds found in European Banking Authority technical standards, namely a 35% cap on exposure to a single sovereign and a restriction capping deposits held at any single bank at 1.5% of that bank's total assets. The company argues that these limits constrain dollar-denominated sovereign holdings and force larger issuers to scatter deposits across dozens of banks just to stay compliant.

The Commission's MiCA consultation closed on September 30, and the responses gathered, including Circle's, will feed into a Commission report on how MiCA is working in practice. This report may come with a legislative proposal if one is warranted.