Europe's Central Banks Push to Rethink Stablecoin Reserve Rules

Europe's central banks are calling for a rethink of the MiCA rules that govern stablecoins. According to reports, they want to remove the requirement that issuers hold at least 30% of their reserves as deposits with EU credit institutions.

The current rule is designed to make stablecoins safer by ensuring that there is enough liquidity in the system to meet redemptions. However, it also creates a link between the banking system and the stablecoin market, which can be problematic if banks are under stress.

During the March 2023 banking turmoil, Circle held part of USDC's reserves at Silicon Valley Bank, and uncertainty over access to those funds pressured the token's peg. This shows how a deposit quota can create two reciprocal exposures: bank distress can impair the reserves behind a token, while a token run can drain a bank's funding.

The reported ESCB alternative focuses on the redemption timetable, using existing EBA liquidity buckets as a test of how quickly the whole reserve can produce cash. This would replace the rule about where a set share of reserves must sit with a test of how quickly the whole reserve can produce cash.