EU stablecoin regulations leave Europe vulnerable, says ECB chief

European Central Bank (ECB) President Christine Lagarde has called connected policymakers to accelerate authorities targeting the risks posed by stablecoins.

Speaking astatine the European Systemic Risk Board (ESRB) league connected Sept. 3, Lagarde warned that portion stablecoins look innovative, they reintroduce long-recognized fiscal vulnerabilities successful caller forms.

According to her:

“The categories of hazard they make are not new. They are risks agelong acquainted to supervisors and regulators.”

Stablecoin risks

Lagarde stressed that liquidity remains the astir contiguous interest of the emerging sector.

She explained that stablecoin issuers often committedness instant redemption astatine par portion investing successful assets that whitethorn not beryllium liquid capable to enactment abrupt demand. That imbalance, if unchecked, tin spark destabilizing runs.

[Editor’s Note: It’s worthy remembering that a abrupt withdrawal request by customers amounting to 5% of assets nether absorption from Northern Rock bank successful the UK led to its collapse, portion successful 2022, Tether managed redemptions of astir 30% without immoderate issue.]

She besides highlighted loopholes successful the EU’s Markets successful Crypto-Assets (MiCA) regulation’s “multi-issuance schemes.” Under this scheme, an EU and non-EU entity could jointly contented fungible stablecoins.

However, the ECB President pointed retired that MiCA requirements bash not use to the non-EU issuer.

So, if investors unreserved to redeem their holdings, unit would autumn disproportionately connected the EU issuer reserves, which whitethorn beryllium insufficient successful the market.

Lagarde noted that this script mirrors problems seen successful cross-border banking groups. Regulators already enforce liquidity standards specified arsenic the nett unchangeable backing ratio to forestall mismatches, but akin protections bash not yet beryllium for stablecoins.

She concluded that Europe risks becoming the anemic nexus successful planetary redemption flows without stronger safeguards.

Calls for stronger legislation

Considering this, Lagarde urged lawmakers to adjacent these gaps by restricting stablecoin schemes that deficiency equivalent protections successful different jurisdictions. She argued that factual authorities is indispensable to guarantee stableness and forestall determination arbitrage.

She stated:

“We indispensable instrumentality factual steps now. European authorities should guarantee that specified schemes cannot run successful the EU unless supported by robust equivalence regimes successful different jurisdictions and safeguards relating to the transportation of assets betwixt the EU and non-EU entities.”

Her remarks besides emphasized the value of planetary coordination to constabulary the emerging industry. Without planetary standards, risks could displacement toward jurisdictions with the weakest rules, undermining Europe’s fiscal safeguards.

The station EU stablecoin regulations permission Europe vulnerable, says ECB chief appeared archetypal connected CryptoSlate.