ECB Calls for Stricter Regulations on Stablecoins to Safeguard Bank Deposits

The European Central Bank (ECB) and the national central banks of the European Union are advocating for tighter restrictions on stablecoins, particularly targeting products that generate indirect returns such as lending, borrowing, and staking. They argue that these yield-bearing stablecoins could blur the lines between electronic money and bank deposits, potentially undermining financial stability and distorting competition within the EU financial sector.

In a recent response to the European Commission's consultation regarding the Markets in Crypto-Assets regulation (MiCA), the European System of Central Banks (ESCB) expressed its continued support for prohibiting crypto-asset service providers (CASPs) from paying remuneration on stablecoins. This prohibition should be extended to cover activities that fall beyond the current MiCA regulations, which will go into effect in June 2024.

The ESCB highlighted that allowing indirect returns on stablecoins could disrupt the established distinction between forms of electronic money and traditional bank deposits. They stated that maintaining strict prohibitions against both direct and indirect remuneration should be a top priority for new legislative efforts.

The ECB's position resonates with recent discussions in the U.S. regarding the Clarity Act, where banking organizations urged for tighter regulations on stablecoin rewards to prevent competing with traditional bank deposits. The act faced challenges and ultimately did not pass.

Additionally, the ECB proposed amendments to MiCA's existing requirements, which currently mandate stablecoin issuers to maintain a portion of their reserves in bank deposits—30% to 60% depending on the stablecoin's significance. The ECB suggested replacing this with liquidity-focused rules that require stablecoin issuers to hold a defined proportion of reserves that can quickly be converted to cash.

Under the proposed changes, the emphasis would shift to the liquidity of reserve assets instead of where they are held. The ESCB noted that large stablecoin deposits could create risks for banks during times of mass withdrawals. As a reference, they pointed to draft standards from the European Banking Authority, which would require significant stablecoins to maintain at least 40% of reserves in assets maturing within one day and 60% within five working days.