EU Central Banks Warn of Stablecoin Regulation Risks for Lenders

The European System of Central Banks (ESCB) has released a paper arguing that stablecoin deposit regulations could lead to instability for lenders. The ESCB, composed of the European Central Bank and the central banks of 27 countries, published the paper in response to Europe's Markets in Crypto-Assets (MiCA) regulation.

The MiCA regulation requires stablecoin issuers to hold 30% of their reserves as bank deposits or 60% for major issuers. However, the ESCB suggests that this requirement could leave banks exposed to a run on stablecoins and recommends instead that MiCA require a minimum percentage held in assets that mature inside one to five working days.

The paper argues that stablecoin issuers can alter banks' funding structures by replacing relatively stable retail deposits with less stable deposits from stablecoin issuers, which are more sensitive to market conditions. This could lead to a less stable funding structure for banks and potentially reduce their capacity to supply credit to the economy.