Echoing a warning from the European Central Bank that their failure may trigger a run on reserves, the European Union’s financial risk watchdog demanded urgent safeguards on stablecoins that are only partially issued in the EU on Thursday.
Because they are linked to a reserve asset, like a currency or basket of assets, stablecoins are a particular kind of cryptocurrency that is intended to maintain a constant value.
Although the EU has one of the strongest regulations on cryptocurrency assets in the world, officials are concerned that issuers from outside the region may be able to import financial risk and enjoy simpler supervision.
The European Systemic Risk Board, led by ECB President Christine Lagarde, released a statement saying,
“The General Board emphasized that third country multi-issuer schemes – with fungible stablecoins issued both inside – and outside – have inherent vulnerabilities which require an urgent policy response.”
Stablecoins must be fully backed by reserves according to EU regulations.
According to Lagarde, the union ought to apply the same regulations to stablecoin issuers both domestically and internationally.
Stablecoins are jointly issued by an EU and a non-EU business under “multi-issuer” schemes, which tilt the playing field because the non-EU issuer is exempt from the stringent EU regulations.
The primary concern is that, because the EU offers the best protections, investors may decide to redeem there in the case of an asset run.
But EU reserves might not be enough to meet concentrated demand, which would put a strain on the bloc’s liquidity and possibly compel the ECB to act.
“Multi-function groups may operate under regulatory regimes which are much more lenient than for financial conglomerates, raising the question of divergent prudential standards,” the ESRB stated.
