Tether CEO Paolo Ardoino raises concerns that Europe’s MiCA regulations on stablecoins, due to excessive cash reserves requirements, could pose systemic risks to banks.
Points
- MiCA’s high reserve requirements for stablecoins could increase risks.
- Tether CEO highlights potential systemic risks for European banks.
- Excessive cash deposits could strain bank liquidity during large redemptions.
- The regulation might exacerbate risks instead of mitigating them.
Paolo Ardoino, CEO of Tether, has expressed alarm over Europe’s MiCA regulations on stablecoins, particularly the high reserve requirements. Ardoino argues that these requirements could inadvertently pose systemic risks to European banks.
MiCA mandates that stablecoin issuers hold 60% of their reserves in cash deposits at European banks. Ardoino warns that this could create liquidity pressures, especially during large-scale redemptions. He illustrated a scenario where a $10 billion stablecoin must keep $6 billion in cash deposits. If banks lend out 90% of this amount, they would struggle to handle a $2 billion redemption request with only $600 million in reserves, potentially leading to bankruptcy.
Ardoino emphasized that such requirements might worsen the very risks they aim to mitigate. By imposing high cash reserves, the regulation could increase the risk of liquidity crises in the banking sector, particularly during periods of high redemption activity.
Explanation
- MiCA Regulations: The Markets in Crypto-Assets （MiCA） regulation aims to establish a comprehensive regulatory framework for digital assets in the EU, including stablecoins.
- Liquidity Risks: High reserve requirements could strain bank liquidity, making it difficult for banks to manage large redemptions without risking insolvency.
- Systemic Risks: The regulation could lead to broader financial instability by creating pressures on bank reserves, especially during market stress.