Circle and Tether Challenge New EU Stablecoin Rules

Banks as New Stablecoin Custodians: A Risk Paradox

Circle and Tether, two of the world’s largest stablecoin issuers, have jointly criticized the European Union’s proposed MiCA regulations, arguing that the bank reserve requirements could expose their digital currencies to the very banking risks the rules aim to mitigate. The companies released a joint statement on Tuesday, urging regulators to reconsider the deposit rules that would force stablecoins to hold reserves in regulated banks.

The European Commission’s MiCA framework, which is set to become law later this year, would require stablecoins to maintain a reserve of at least 100 % of their issued supply in banks. Circle and Tether contend that such a mandate would create new systemic vulnerabilities, as the digital assets would be tied to the creditworthiness of banks that are themselves subject to fluctuating market conditions. They also argue that the requirement would stifle innovation and increase costs for users worldwide.

The issuers’ main concern is that the reserve rule would effectively make banks the custodians of stablecoins, subjecting them to the same liquidity and solvency pressures that banks face. „By requiring stablecoins to hold reserves in banks, we are essentially asking banks to take on the same risks that they are already managing,” said a spokesperson for Circle. Tether’s representative echoed this sentiment, noting that the rule could lead to a „concentration of risk” in a few large institutions. The companies also highlighted that the MiCA proposal does not account for the rapid growth of stablecoins, which now total over $100 billion in market value, and that the reserve requirement could create a bottleneck for liquidity.

Could the Proposal Be Reversed? What Will Regulators Do?

The joint statement calls on the European Commission to adopt a more flexible approach, such as allowing issuers to hold reserves in a broader range of financial institutions or to use alternative collateral. It also requests that regulators provide a clear definition of „bank reserve” and outline a phased implementation timeline. „We are open to dialogue with regulators to find a solution that protects consumers while preserving the benefits of stablecoins,” said Circle’s spokesperson. Tether added that a collaborative approach would help maintain market confidence and avoid unintended disruptions.

The European Banking Authority has indicated that it will review the proposal, but no definitive timeline has been announced. The outcome could shape the future of digital currencies in the EU and influence global regulatory standards. If the reserve rule remains unchanged, stablecoin issuers may face increased compliance costs and reduced operational flexibility, potentially slowing adoption across Europe.

Frequently Asked Questions

What is MiCA and why does it matter? MiCA, the Markets in Crypto-Assets Regulation, is the EU’s first comprehensive framework for digital assets. It aims to protect consumers, ensure market integrity, and prevent financial crime. Its rules will apply to all crypto issuers operating within the EU.

How would bank reserve rules affect stablecoin users? If implemented, users could experience slower transaction times and higher fees, as stablecoins would need to hold more liquid assets in regulated banks, limiting their ability to move funds quickly.

What alternatives are the issuers proposing? Circle and Tether suggest allowing reserves to be held in a broader range of financial institutions, using alternative collateral, or adopting a phased approach to reduce systemic risk while maintaining liquidity.