Disagreement between European Commission and European Central Bank over potential risks posed by US stablecoins, as per a recent report.
EU Tackles Regulatory Gaps in Stablecoin Market
In a bid to safeguard its financial system and maintain monetary sovereignty, the European Union (EU) is addressing regulatory loopholes in the stablecoin market. The current stablecoin regulations, primarily governed by the Markets in Crypto-Assets Regulation (MiCAR), have left a significant gap for foreign-issued stablecoins, such as US dollar-backed ones like USDC.
According to an official from the European Commission, it makes no economic sense for U.S. users to impose redemption requests on European stablecoin issuers, as this could potentially force EU entities to honor redemptions without guaranteed reserves, leading to systemic risk if a run occurs. This regulatory gap exposes the EU financial system to risk via cross-border regulatory arbitrage.
In response to the growing dominance of US dollar-pegged stablecoins, the EU is accelerating its plans for a digital euro. The digital euro, which may be launched on public blockchains like Ethereum or Solana, is seen as a strategic tool to maintain autonomy and offer a more stable, regulated alternative to US stablecoins.
The debate in the EU includes whether European stablecoins held by non-residents should maintain the same fungibility status. Concerns have been raised that large foreign holdings could undermine the ECB’s control over monetary policy. The digital euro is intended to limit the systemic risks posed by interest-paying and dollar-backed stablecoins siphoning liquidity from traditional banks.
Under MiCAR, EU stablecoin issuers are required to be willing to directly redeem stablecoins to end users, while draft US federal legislation and New York rules do not require this. The daily transaction limit for foreign currency stablecoins across the entire EU is €200 million, but this only covers mainstream payments.
The European Commission and European Central Bank (ECB) have clashed over stablecoins, with the ECB raising concerns about sovereignty issues related to stablecoins. However, for self-hosted wallets, it can be trickier to know the owner's location. The vast majority of people hold their assets with an exchange or custodian, making it easier to know their residence.
The MiCA regulations for crypto-assets fully came into force in January. A clause in the MiCAR regulation requires a report from the Commission on whether there need to be amendments to address issues such as DeFi. Notably, ECB President Lagarde has called for a MiCAR revision, despite the question not touching on the CBDC.
In the event of a stablecoin run, there's a possibility that US stablecoin holders might want to redeem coins in the EU, but the terms and conditions of USDC do not allow this unless the person resides in the EU. The ECB has expressed concerns over the global usage of US stablecoins.
A piece on stablecoin fungibility is planned to be published within the week. Peter Kerstens, the MiCAR architect who is writing the report, believes there's no need for MiCAR v2. The Politico report suggests that the discussion may be about fungibility, referring to whether a stablecoin issued in multiple jurisdictions is treated the same as other versions.
Regulatory alignment to cover foreign-issued stablecoins fully is considered crucial to address the systemic risks posed by the current regulatory gaps. The EU's active discussions and shifts toward a publicly verifiable digital euro reflect efforts to close these gaps and safeguard the EU’s financial system and monetary policy autonomy.
[1] The Block
[2] CoinDesk
[3] Reuters
[4] Financial Times
[5] The Economist
- The European Union is working towards regulatory alignment to cover foreign-issued stablecoins fully, addressing the systemic risks posed by the current regulatory gaps.
- In responding to the growing dominance of US dollar-pegged stablecoins, the EU is accelerating its plans for a digital euro, which is intended to offer a more stable, regulated alternative and limit systemic risks posed by interest-paying and dollar-backed stablecoins.
- Understandings gained from the insights provided by stablecoins, digital euros, and legal discussions about their regulation are crucial for businesses in the finance and technology sectors.
- The EU's active discussions and shifts toward a publicly verifiable digital euro reflect efforts to close regulatory gaps in the stablecoin market and safeguard the EU's financial system and monetary policy autonomy, as reported by sources such as The Block, CoinDesk, Reuters, Financial Times, and The Economist.