The ECB wants to change MiCA rules for stablecoins. It argues that mandatory bank deposits could create a new risk.

European crypto regulation MiCA could see a significant change in the area of stablecoins. The European Central Bank, together with the national central banks of the European Union countries, recommends abolishing the rule requiring stablecoin issuers to hold a specified portion of their reserves as deposits with banks. The measure was originally intended to increase the security of digital currencies pegged to traditional currencies, but according to central banks, it could create a new risk for the banking sector itself, Reuters reported.

The debate comes at a time when stablecoins are increasingly moving beyond the purely cryptocurrency environment. Their global market capitalization is in the hundreds of billions of dollars, with dollar-pegged stablecoins continuing to dominate the market. The European Central Bank has long warned that the growing role of these assets could impact not only the cryptocurrency sector but also banks, monetary policy, and financial stability.

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MiCA Requires a Portion of Stablecoin Reserves to Be Held in Banks

A stablecoin differs from cryptocurrencies like Bitcoin primarily in that its value attempts to mirror a specific underlying asset, most often the US dollar or the euro. For an issuer to be able to redeem tokens at users’ request, they must hold corresponding reserves against them.

The European regulation Markets in Crypto-Assets, or MiCA, therefore sets out relatively strict rules on how these reserves are to be managed.

According to current legislation, for affected stablecoins, at least 30 percent of the relevant reserves must be held as deposits in credit institutions. For significant tokens, the required proportion can reach 60 percent. The remaining reserves can be placed, for example, in safe and highly liquid financial assets.

At first glance, this is a conservative approach. If an issuer has a portion of funds deposited directly in a bank, they should have sufficient means for potential stablecoin redemptions. However, the ECB warns that this system also has a downside.

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ECB Fears Sudden Withdrawals of Billions from Banks

According to central banks, the problem lies primarily in the size of the stablecoin market. If a significant issuer were to hold tens of billions of euros in bank deposits, it would represent a substantial source of funding for the bank. However, such funds are not the same as ordinary deposits from households or businesses. In the event of stablecoin issues, the issuer might need to withdraw reserves very quickly to satisfy token holders’ demands.

The ECB and national central banks therefore warn that mandatory placement of a large portion of reserves in banks could gradually replace more stable retail deposits with less stable funding originating from stablecoin issuers. If a massive outflow of funds from a stablecoin were to occur subsequently, the problem could also spread to the banking system, according to Reuters.

This is not merely a theoretical risk. Events from 2023 showed that the connection between stablecoins and traditional banks can work in both directions. The stablecoin USD Coin (USDC) briefly lost its peg to the dollar when it was revealed that a portion of Circle’s reserves was held in the failing Silicon Valley Bank. The ECB uses this case as an example of the risk that can arise from too close a link between stablecoin reserves and the banking system. In its analysis, the ECB also warns that the opposite scenario – a run on a stablecoin and subsequent rapid withdrawal of reserves from banks – can spread problems in the opposite direction.

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Liquid Assets to Replace Mandatory Bank Deposits

Central banks therefore propose changing the logic of the current system. Issuers would not have to keep a fixed portion of reserves directly in banks. Instead, regulation would focus more on the actual liquidity of reserves.

According to the proposal, a portion of the assets backing the stablecoin would have to be placed in assets that can be converted to cash within a very short period. The proposal envisages a timeframe of approximately one to five business days, Reuters writes.

The goal is therefore not simply to weaken the stablecoin backing requirements. Rather, it would change the way their security is assessed.

For issuers, this could mean greater flexibility in managing billion-dollar reserves. Alongside bank deposits, they could more extensively use, for example, very short-term and highly liquid financial instruments.

ECB Also Does Not Want to Open the European Market Without Restrictions

However, relaxing one rule does not mean that the European Central Bank is advocating a general loosening of stablecoin regulation.

Quite the opposite. The ECB has long highlighted, for example, so-called “multi-issuance models,” where the same stablecoin is issued by an entity within the European Union and concurrently by a company outside the EU.

For users, both tokens can be practically interchangeable. However, a portion of the reserves might be located outside the European Union and not be subject to the same rules as the assets of a European issuer.

The ECB is particularly concerned about a situation where there would be a run on a stablecoin. Token holders from different parts of the world might try to redeem their funds through a European issuer, as European rules provide stronger protection for holders. However, the reserves actually available in the EU might not be sufficient for all requests.

The central bank therefore believes that such cross-border models should only be possible if there are sufficiently strong rules in other jurisdictions and guarantees that reserves will actually be available where needed in a crisis.

Stablecoins are Primarily a Dollar Market

The European debate has another dimension. Although MiCA has created one of the most comprehensive regulatory frameworks for cryptocurrencies in the world, the global stablecoin market continues to be dominated by tokens pegged to the US dollar.

This presents a broader strategic question for Europe. Stablecoins are gradually being used not only for cryptocurrency trading but also for money transfers, settlement of tokenized assets, or other blockchain financial services. The ECB warns that a significant expansion of foreign stablecoins could alter the structure of bank deposits and also affect the way monetary policy is transmitted to the real economy. 

At the same time, the European Central Bank is developing its own infrastructure for tokenized finance. In September, the Eurosystem launched the Pontes system, which enables the settlement of wholesale transactions with tokenized assets directly in central bank money.

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MiCA Change Not Yet Approved

For investors and cryptocurrency users, it is important that the current position of the ECB and European central banks does not mean an immediate change to MiCA. This is a recommendation within the framework of a further review of the European regulatory framework, and existing rules remain in force.

However, the debate shows how quickly European regulators’ view on stablecoins is evolving. The original idea was relatively simple – the more reserves an issuer holds in regulated European banks, the safer the stablecoin should be. Central banks now warn that with a sufficiently large market, the same rule could create a new link between the cryptocurrency and banking sectors.

European stablecoin regulation could thus shift from a simple requirement of where reserves must be held, to the question of how quickly they are truly available in a crisis. The issuer’s ability to manage large-scale token redemptions without transferring problems to the banking system will be crucial for the future form of the rules.

Šimon Hauser

Šimon Hauser is a Czech financial journalist, specializing in cryptocurrencies, fintech and global capital markets, among other things. With deep insight into the digital economy and investment strategies, he helps readers understand the transformation of the financial sector. His analyses regularly connect technological innovations with the real-world impact on modern investing.

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