ESCB Faults Stablecoin Deposit Rule, Seeks Liquidity Requirements

The European System of Central Banks (ESCB) has submitted its response to the European Commission's review of MiCA, a regulation that affects stablecoins. The ESCB argues that the current rule requiring at least 30% of reserve assets to be held as deposits with credit institutions is flawed and creates a direct link between issuers and banks.

This link can transmit stress in both directions: if a run develops on a single token, the issuer may have to pull its deposits quickly, which can put the bank in difficulty. Conversely, if a bank runs into trouble, it can trigger a run on the stablecoin.

The ESCB cites the events of March 2023 as evidence, when Silicon Valley Bank's troubles triggered a decline in the value of USDC, a dollar stablecoin that held part of its reserve at SVB. The central banks propose replacing the deposit requirement with liquidity requirements tied to the availability of funds.

The ESCB also concedes that deposits do achieve something: they create a liquidity buffer and spare the issuer from forced sales below book value. However, it argues that this can be achieved without a fixed deposit ratio by using repo transactions, overnight reverse repos, or short-dated government bonds.