MiCA’s Stablecoin Gamble: How Europe’s Bank Mandate Could Backfire

MiCA’s Stablecoin Gamble: How Europe’s Bank Mandate Could Backfire

The European Union’s Markets in Crypto-Assets (MiCA) regulation marks a pivotal moment in the global regulation of digital assets, particularly concerning stablecoins. This comprehensive framework aims to bring clarity and stability to the burgeoning crypto market within the EU. However, a closer examination of its specific provisions, especially those pertaining to stablecoin reserves, reveals a potentially problematic approach.

As a financial journalist with a keen interest in the intersection of finance and technology and having observed the evolution of digital assets and their regulatory landscapes, I contend that the MiCA stipulation requiring 60% of stablecoin reserves to be held within EU banks could inadvertently introduce instability and hinder the very innovation it seeks to foster. While seemingly aimed at enhancing security, this mandate may instead create new vulnerabilities and fragment the global stablecoin market.

The Stablecoin Landscape

Before dissecting the intricacies of MiCA’s impact, it’s essential to grasp the current dynamics of the stablecoin market. As of early 2024, this sector boasts a market capitalization exceeding $130 billion, a testament to the growing demand for digital assets that offer price stability. Tether remains the dominant player, commanding approximately 70% of this market share. This dominance isn’t accidental; it largely reflects market confidence in Tether’s reserve composition and its consistent ability to maintain its peg to the U.S. dollar.

The success of Tether can be directly attributed to its reserve strategy, which predominantly involves holding U.S. Treasuries and other highly liquid dollar-denominated assets. Tether’s transparency, albeit sometimes scrutinized, through its regular attestation reports provides insights into this strategy.

According to their latest reports, a significant portion, around 85% of their reserves, are held in cash and cash equivalents, with U.S Treasuries forming the lion’s share. This preference for U.S. Treasuries is not arbitrary. These instruments are backed by the full faith and credit of the United States government and offer unparalleled liquidity. The daily trading volumes in the secondary market for U.S. Treasuries routinely average over $910 billion, making them exceptionally easy to buy and sell without significantly impacting their price. This deep liquidity is a crucial factor in maintaining the stability of a stablecoin.

Other significant stablecoins, such as USD Coin, prioritize holding reserves in highly liquid and low-risk assets, including U.S. Treasuries and cash held in regulated financial institutions. This industry-wide preference for U.S. Treasuries underscores their perceived safety and liquidity within the global financial system. The ability to quickly convert reserves into fiat currency during periods of high redemption pressure is paramount for a stablecoin to maintain its peg.

Protectionism Masquerading as Security?

MiCA’s requirement that 60% of stablecoin reserves be held in EU banks appears to be more of a protectionist measure aimed at bolstering the European financial sector than a genuine enhancement of stablecoin security. This assertion becomes particularly compelling when comparing the liquidity of the European bond market to that of U.S. Treasuries. While the EUR government bond market is substantial, it pales compared to the U.S. Treasury market in terms of trading volume and depth. The lower liquidity and often wider bid-ask spreads in European government bonds raise concerns about the ease and cost of liquidating these assets during periods of market stress.

Tradeweb reported in September 2024 that the average daily volume for European government bonds was $49.5 billion. As I do not have the exact average daily trading data from the European Central Bank, I put fair estimated daily trading volumes of around €100 billion for this comparison. This figure is less than one-ninth of the daily trading volume observed in U.S. Treasuries, which is over $910 billion.

This significant liquidity disparity is not merely an academic point; it has real-world implications for stablecoin issuers who need to access their reserves quickly to meet redemption requests. During market turbulence, the ability to quickly and efficiently convert reserve assets into fiat currency is critical for maintaining the stablecoin’s peg. Lower liquidity in the European bond market could translate to higher transaction costs and potential delays in accessing funds, potentially undermining the stability MiCA aims to achieve.

Furthermore, the concentration of reserves within EU banks raises questions about the potential for systemic risk within the European financial system. While diversification is generally considered a prudent risk management strategy, forcing stablecoin issuers to concentrate a significant portion of their reserves within a specific regional banking system could amplify the impact of any localized financial instability.

The Silicon Valley Bank Lesson

The collapse of Silicon Valley Bank (SVB) in March 2023 is a stark and relevant case study highlighting the inherent risks associated with relying solely on the traditional banking system for stablecoin reserves. When SVB experienced a rapid bank run, Circle’s USD Coin, despite being considered a highly reputable stablecoin, temporarily lost its peg, plummeting to around $0.87. This dramatic event occurred even though only approximately 10% of USD Coin’s reserves were directly affected by the SVB failure. This incident underscored two critical vulnerabilities: firstly, bank deposits, even within seemingly well-regulated institutions, are not entirely risk-free, and secondly, the operational limitations of the traditional banking system, such as weekend closures and processing delays, are fundamentally incompatible with the 24/7 nature of cryptocurrency markets.

Imagine the amplified impact if, under MiCA’s regulations, 60% of a stablecoin’s reserves were caught in a similar situation. The inability to access a significant portion of their reserves during a critical period could have catastrophic consequences, potentially triggering a systemic crisis within the European crypto ecosystem and eroding trust in stablecoins more broadly. The SVB episode demonstrated the speed at which confidence can evaporate in the financial system and the potential for contagion to spread rapidly. MiCA’s banking-centric approach, while intended to provide security, could inadvertently create a single point of failure, making the system more vulnerable to such shocks.

The Liquidity Premium of U.S. Treasuries

U.S. Treasuries have earned their reputation as the world’s premier safe-haven asset for compelling reasons, primarily their unparalleled market depth and liquidity. This deep liquidity ensures minimal price slippage even during periods of large-scale liquidations. During the height of the COVID-19 market panic in March 2020, the U.S. Treasury market remained remarkably robust despite unprecedented volatility across global markets. While bid-ask spreads widened temporarily, the market continued functioning efficiently, allowing investors to buy and sell Treasuries relatively quickly. This resilience during extreme stress underscores the inherent strength and liquidity of the U.S. Treasury market.

Conversely, European government bonds, particularly those issued by smaller EU nations, have experienced significant liquidity challenges during various crises. During the Eurozone crisis of 2011-2012, some sovereign bonds became practically untradeable, highlighting the potential for liquidity to dry up during times of stress. For a stablecoin issuer needing to process large redemption requests quickly, such a scenario could prove disastrous, making it difficult, if not impossible, to access the necessary funds to maintain the peg. The historical data demonstrates U.S. Treasuries’ superior liquidity and stability compared to their European counterparts, making them a more reliable asset for backing stablecoins.

The Banking System’s Inherent Vulnerabilities

MiCA’s reliance on the traditional banking system introduces additional layers of risk beyond just liquidity concerns. The banking turmoil of 2023, which witnessed the failures of both SVB and Signature Bank and First Republic Bank in the United States, serves as a potent reminder that even seemingly well-regulated banks can collapse under stress. European banks are not immune to such vulnerabilities. The forced merger of Credit Suisse with UBS in 2023, orchestrated to prevent a broader financial crisis, stands as a recent and prominent example.

Furthermore, unlike U.S. Treasuries held directly, bank deposits are subject to counterparty risk. If the bank holding the stablecoin reserves faces financial difficulties or even fails, accessing those reserves could become problematic.

Additionally, under EU banking regulations, bank deposits are potentially subject to bail-in provisions. In a crisis, depositors (including stablecoin issuers) could see their funds used to recapitalize the failing bank. This introduces a level of risk that stablecoin issuers cannot directly control, which is not present when holding highly liquid government securities. Banks also typically reinvest deposits in various assets, creating additional layers of risk and complexity that are opaque to the stablecoin issuer.

Market Fragmentation and Innovation Barriers

MiCA’s stringent requirements could lead to fragmentation in the global stablecoin market. Major issuers like Tether, who have established their reserve management strategies based on global liquidity and the reliability of U.S. Treasuries, might find the cost and complexity of complying with MiCA’s requirements prohibitive. They might opt to limit their operations within the EU rather than fundamentally restructure their reserve management strategies. This could create a bifurcated market: globally accessible stablecoins operating largely outside the EU and smaller, potentially less liquid stablecoins operating within the regulatory framework of MiCA.

This fragmentation could hinder the seamless flow of capital and innovation within the European digital asset space. New stablecoin projects seeking to launch in the EU would face significant barriers to entry, needing to establish relationships with EU banks and navigate complex reserve requirements before even launching their product. This could concentrate power in the hands of established financial institutions, potentially stifling the decentralized ethos that underpins much of the cryptocurrency movement. The increased regulatory burden and operational complexity could also make it less attractive for innovative stablecoin projects to establish themselves within the EU, potentially pushing innovation to other jurisdictions with more accommodating regulatory environments.

Alternative Approaches to Foster Stability

Rather than imposing potentially risky banking arrangements, regulators could explore alternative approaches focusing on transparency, risk-based assessments, and a broader acceptance of high-quality collateral. One such approach would be enhancing transparency and mandating stablecoin reserves’ auditing regardless of geographical location. Independent audits conducted by reputable firms could provide greater assurance to users.

Another avenue would be to develop clear and objective standards for assessing the quality of reserve assets, focusing on criteria such as liquidity, credit risk, and market depth. This would allow for a more nuanced approach to reserve management, recognizing assets like U.S. Treasuries’ proven stability and liquidity. Regulators could establish a framework that allows for a more diverse range of high-quality collateral, including U.S. Treasuries and other highly liquid government securities from reputable jurisdictions, provided they meet stringent risk criteria. This approach would acknowledge the stablecoin market’s global nature and certain assets’ established role in maintaining stability.

The data and historical precedent are clear: U.S. Treasuries have consistently demonstrated their value as stable and liquid collateral through multiple periods of financial stress. MiCA’s attempt to artificially promote European alternatives through regulatory mandate does not alter this fundamental market reality. A more pragmatic approach would be to acknowledge the global nature of stablecoins and focus on establishing robust standards for reserve quality and transparency rather than imposing geographically restrictive requirements.

Balancing Innovation and Stability

While MiCA’s underlying intentions to protect consumers and ensure the stability of the stablecoin market are undoubtedly laudable, its current implementation risks achieving the opposite of its intended effect. By compelling issuers to hold a significant portion of their reserves in potentially less liquid and potentially riskier assets within the European banking system, the regulation may inadvertently increase, rather than decrease, systemic risk within the European crypto ecosystem.

The stablecoin market undeniably requires thoughtful and effective regulation. However, such regulation should be grounded in market realities, informed by historical data, and designed to foster innovation while mitigating genuine risks.

As the digital asset industry evolves rapidly, regulatory frameworks must strike a delicate balance between promoting stability and encouraging innovation without erecting artificial barriers that could ultimately harm the very users they are designed to protect. A more globally collaborative and less geographically prescriptive approach to stablecoin regulation would likely be more effective in fostering a stable and innovative digital asset ecosystem.

 

Source: https://intpolicydigest.org/mica-s-stablecoin-gamble-how-europe-s-bank-mandate-could-backfire/

 

Anndy Lian is an early blockchain adopter and experienced serial entrepreneur who is known for his work in the government sector. He is a best selling book author- “NFT: From Zero to Hero” and “Blockchain Revolution 2030”.

Currently, he is appointed as the Chief Digital Advisor at Mongolia Productivity Organization, championing national digitization. Prior to his current appointments, he was the Chairman of BigONE Exchange, a global top 30 ranked crypto spot exchange and was also the Advisory Board Member for Hyundai DAC, the blockchain arm of South Korea’s largest car manufacturer Hyundai Motor Group. Lian played a pivotal role as the Blockchain Advisor for Asian Productivity Organisation (APO), an intergovernmental organization committed to improving productivity in the Asia-Pacific region.

An avid supporter of incubating start-ups, Anndy has also been a private investor for the past eight years. With a growth investment mindset, Anndy strategically demonstrates this in the companies he chooses to be involved with. He believes that what he is doing through blockchain technology currently will revolutionise and redefine traditional businesses. He also believes that the blockchain industry has to be “redecentralised”.

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Czech National Bank Governor Considers Buying Bitcoin To Diversify Reserves

Czech National Bank Governor Considers Buying Bitcoin To Diversify Reserves

Czech National Bank governor Aleš Michl is considering investing in Bitcoin as part of a potential diversification strategy for the country’s foreign exchange reserves.

Michl said in an interview with CNN Prima News that he is considering acquiring “a few Bitcoin.”

No Plans In Place Yet For The Czech National Bank To Buy Bitcoin

Before the national bank can start buying BTC, it will need to get the approval from its board, which comprises seven members. Janis Aliapulios, one of the advisors to the board, confirmed that the bank is not currently planning a Bitcoin investment when he was asked about a potential acquisition.

Nevertheless, Michl is still open to the idea of the bank diversifying its portfolio through BTC. Until this happens, the bank will continue to invest in gold as part of its current diversification plan. Aliapulios said that the bank aims to increase its holdings in the popular commodity to around 5% of its total assets by 2028.

 

BTC Could Become A “Safe” Reserve Asset

Michl’s remarks come amid a shift among institutions and governments, who are evaluating whether BTC could be included in their financial strategies, according to author and intergovernmental blockchain expert Anndy Lian.

Lian says there could be a “gradual redefinition of what constitutes a ‘safe’ reserve asset” as more governments and institutions mull an investment in BTC.

In the past, gold has been the go-to asset for portfolio preservation. Looking at the last year, however, Bitcoin has risen more than 131% while gold’s price only climbed 30%, according to TradingView data.

One deterrent is BTC’s high levels of volatility. Lian warned that BTC’s fluctuations could be a “double-edged sword” for national reserves that could lead to broader financial swings.

 

 

Source: https://insidebitcoins.com/news/czech-national-bank-governor-considers-buying-bitcoin-to-diversify-reserves

Anndy Lian is an early blockchain adopter and experienced serial entrepreneur who is known for his work in the government sector. He is a best selling book author- “NFT: From Zero to Hero” and “Blockchain Revolution 2030”.

Currently, he is appointed as the Chief Digital Advisor at Mongolia Productivity Organization, championing national digitization. Prior to his current appointments, he was the Chairman of BigONE Exchange, a global top 30 ranked crypto spot exchange and was also the Advisory Board Member for Hyundai DAC, the blockchain arm of South Korea’s largest car manufacturer Hyundai Motor Group. Lian played a pivotal role as the Blockchain Advisor for Asian Productivity Organisation (APO), an intergovernmental organization committed to improving productivity in the Asia-Pacific region.

An avid supporter of incubating start-ups, Anndy has also been a private investor for the past eight years. With a growth investment mindset, Anndy strategically demonstrates this in the companies he chooses to be involved with. He believes that what he is doing through blockchain technology currently will revolutionise and redefine traditional businesses. He also believes that the blockchain industry has to be “redecentralised”.

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Czech National Bank governor weighs Bitcoin for future reserve strategy

Czech National Bank governor weighs Bitcoin for future reserve strategy

The governor of the Czech National Bank, Aleš Michl, recently considered Bitcoin as a potential diversification strategy for the country’s foreign exchange reserves, highlighting growing government interest in cryptocurrency as a savings technology.

In an interview with CNN Prima News, Michl said he was considering acquiring “a few Bitcoin” for diversification, which wouldn’t count as a significant investment for the bank.

The Czech National Bank’s board, composed of seven members, would need to approve any decision to acquire Bitcoin.

When asked about a potential acquisition, Janis Aliapulios, an adviser to the board, confirmed that the bank is not currently planning a Bitcoin BTCtickers down$96,400 investment. Still, Michl remains open to considering Bitcoin diversification in the future.

“To sum up, CNB is now not considering buying crypto assets for its reserves. However, Governor Michl did not rule out further future debate on this topic,” Aliapulios told Cointelegraph.

The bank will continue its diversification plan via gold purchases in the near future, with plans to increase gold holdings to about 5% of its total assets by 2028, Aliapulios added.

Bitcoin could emerge as a significant reserve asset next to gold, thanks to its robust yearly returns. During the past year, Bitcoin rose by over 131% while gold prices rose by about 30%, TradingView data shows.

Bitcoin’s 130% yearly returns occurred while corporate executives were selling stocks at unprecedented levels at a ratio of six sellers to buyers, Cointelegraph reported on Dec. 13.

Michl’s remarks suggest a growing shift among governments and institutions reevaluating their financial strategies to include Bitcoin, according to Anndy Lian, author and intergovernmental blockchain expert:

“As more countries ponder this path, we might see a gradual redefinition of what constitutes a ‘safe’ reserve asset. If Bitcoin becomes a staple in national reserves, it could fundamentally alter the landscape of global finance, pushing for more decentralized and digital approaches to economic stability.”

However, Bitcoin’s price volatility may also be a “double-edged sword” for national reserves, which could lead to wider financial swings, added Lian.

Related: Bitcoin needs trading volume boost to rally above $105K in January

US Bitcoin Act may bolster Bitcoin’s status as a savings technology

Bitcoin’s status as a savings technology is also gaining traction in the United States. Known as one of the most anticipated crypto-related bills, the Bitcoin Act — championed by Wyoming Senator Cynthia Lummis — proposes the creation of a strategic Bitcoin reserve.

The Bitcoin reserve proposal is gaining significant support thanks to US President-elect Donald Trump’s victory in the November 2024 election and the incoming Republican Party Senate majority, according to Anastasija Plotnikova, co-founder and CEO of Fideum.

With bipartisan support, the bill could be accepted during the next four years. “State-level momentum is building, with initiatives such as Pennsylvania’s Bitcoin Strategic Reserve Act serving as a model for broader adoption,” Plotnikova said.

The idea of a strategic Bitcoin reserve received support from both sides of the political aisle, including from Democratic Party Representative Ro Khanna, the first Democratic lawmaker to back a Bitcoin reserve.

The states of Texas and Pennsylvania have also made similar proposals.

Bitcoin may eventually surpass the $1 million price tag if the Bitcoin Act is accepted by US lawmakers, according to Adam Back, co-founder and CEO of Blockstream, the inventor of Hashcash and one of the most notable cryptographers in the industry.

 

Source: https://cointelegraph.com/news/czech-national-bank-governor-open-bitcoin-investment-future

Anndy Lian is an early blockchain adopter and experienced serial entrepreneur who is known for his work in the government sector. He is a best selling book author- “NFT: From Zero to Hero” and “Blockchain Revolution 2030”.

Currently, he is appointed as the Chief Digital Advisor at Mongolia Productivity Organization, championing national digitization. Prior to his current appointments, he was the Chairman of BigONE Exchange, a global top 30 ranked crypto spot exchange and was also the Advisory Board Member for Hyundai DAC, the blockchain arm of South Korea’s largest car manufacturer Hyundai Motor Group. Lian played a pivotal role as the Blockchain Advisor for Asian Productivity Organisation (APO), an intergovernmental organization committed to improving productivity in the Asia-Pacific region.

An avid supporter of incubating start-ups, Anndy has also been a private investor for the past eight years. With a growth investment mindset, Anndy strategically demonstrates this in the companies he chooses to be involved with. He believes that what he is doing through blockchain technology currently will revolutionise and redefine traditional businesses. He also believes that the blockchain industry has to be “redecentralised”.

j j j