Tether CEO Decries EU MiCA Leaves Stablecoins Vulnerable to ‘Systemic’ Banking Risks

Tether chief executive Paulo Ardoino considers Europe’s MiCA framework, whose enforcement obligates stablecoin issuers to raise bank reserve requirements, thus increasing systemic risks and stability concerns.

Ardoino points out that the European Union (EU) ushers in a comprehensive framework as it takes full effect on December 30. The rules introduce banking concerns for the stablecoin issuers capable of threatening the stability of the broader crypto space. 

MiCA Poses Systemic Banking Risks

The Markets in Crypto-Assets Regulation (MiCA) is the pioneer framework for digital assets and becomes effective at the end of the year. It obligates the stablecoin issuers to hold at least 60% of their reserve assets within the European banks.

Ardoino points to the scenario as capable of introducing systemic risks for the stablecoin issuers since the banks can loan 90% of the reserves. The executive who steers the issuer of the largest global stablecoin, USDT, recently realized $120 billion in market value.

Ardoino disclosed the concerns in an interview at the Plan B Lugano in Switzerland. The executive considers a scenario where €10 billion is under management, compels the stablecoin issuer to allocate €10 billion in cash deposits. The awareness that banks can lend out 90% of the balance sheet translates to €5.4 billion to clients, leaving €0.6 billion in the balance sheet. 

Ardoino criticism of the MiCA provision on reserves emerged from past experiences when notable stablecoin issuers encountered bank-related issues. Notably, Circle’s USD Coin (USDC) lost the dollar peg in March last year, dropping to a low of $0.8774.

The executive explains that the depegging witnessed on the second-largest stablecoin emerged after Circle could not withdraw $3.3 billion of the reserves held within the Silicon Valley Bank before shutting down operations. 

Is MiCA Threatening Stablecoin Stability? 

Ardoino notes that the MiCA-imposed guideline for the bank reserve requirements implies that the portion of the stablecoin reserves will become a constituent of the bank balance sheets. Such raises significant concerns if the bank goes bankrupt. 

Ardoino examined the context where the stablecoin issuer was to deposit €1 million in a European bank account with a federal deposit guarantee capped at 100,000 euros. This implies that the bank’s deposit is guaranteed to a maximum of €100,000 if the bank plunges into bankruptcy. The rest of the deposit is subject to bankruptcy since the money goes to the bank’s balance sheet. 

Ardoino adds that the stablecoin issuers could shield themselves against bankruptcy challenges as they comply with the new MiCA regime by acquiring securities. He considers that issuers could purchase government bonds and T-bill securities. 

If the bank were to plunge into bankruptcy, the issuer would have securities since they are nominal. If the bank goes bankrupt and you have securities, the securities are nominal. Ardoino indicates that the security will be available to move to another bank.

Several of the leading financial institutions portray readiness for the upcoming MiCA enforcement. In particular, Societe Generale – the 19-largest group by assets – unveiled a partnership with Bitpanda towards launching MiCA-compliant stablecoin, identified as euro-denominated EUR CoinVertible (EURCV).

Mounting Concerns Over MiCA’s Impact on Web3 Firms

The concerns raised by Tether’s Ardoino echo the questions raised by the industry expert regarding the MiCA framework’s ramifications. 

The regulatory experts are concerned that MiCA could trigger an exodus towards the Middle East. The number of EU-based Web3 companies would reduce drastically. 

The consolidation is of immense concern among the small firms experiencing inadequate capital. Fideum chief executive Anastasija Plotnikova. The executive considers that small firms would encounter difficulties, a concern reiterated by the blockchain infrastructure firm.

Plotnikova warns that compliance with the MiCA requirements will lead to widespread consolidation. Such could translate to a predatorial nature, with venture capital and larger crypto brands acquiring talent off the shelf. 

The fears by Fideum are evident with crypto firms preparing for MiCA enforcement with the recent acquisition of Netherlands’ pioneer crypto broker, Coin Meester, by the Kraken exchange as it pursues European expansion.