Stablecoin Reserves Need to Be Diverse, EU Bank Agency Chief Says

Forthcoming European Union rules to govern stablecoins will focus on ensuring issuers have diverse reserves, manage conflicts of interest, and don’t transmit risks to other players, the Chair of the European Banking Authority (EBA) has said.

The bloc’s Markets in Crypto Assets rules, known as MiCA, are set to take effect as of 2024, but crypto market players should start adjusting their operations now, said José Manuel Campa, whose agency will play a key role in its implementation by drafting subsidiary legislation.

MiCA requires issuers of stablecoins to have enough reserves to manage turbulence – and “the EBA will be paying special attention to diversification of the deposit component of the reserve,” Campa wrote in an article produced for the Eurofi lobby group.

Campa highlighted the importance of stablecoin issuers mitigating conflicts of interest, and of mapping connections to custodians and trading platforms, to ensure risks don’t ricochet within the crypto ecosystem.

While the law, which licenses wallet providers and exchanges, is not yet formally etched into the statute book, the “contours of MiCA are, by now, familiar and I would encourage market participants to already adjust their operations” to ensure sound risk management, Campa said.

The dramatic collapse of algorithmic stablecoin terraUSD last year focused regulators’ minds on how to govern cryptocurrencies that are tied to the value of fiat currency or to other assets such as gold.

The November collapse of crypto exchange FTX and revelations of its murky relationship with trading arm Alameda Research has also drawn attention to risks posed by large and often complex crypto conglomerates.

“The corporate structures, business models and exposures of the main crypto market participants are not transparent,” Martin Moloney wrote for Eurofi. Moloney is secretary-general of the International Organization of Securities Commissions, which is soon set to publish a consultation on crypto standards that will be finalized later in the year.

The risk “is exacerbated by evident market concentration with the three largest so-called trading platforms,” Moloney added.