The European Union’s (EU) approach to regulating systemic stablecoins through the Markets in Crypto Assets (MiCA) framework is flawed and will only push issuers away, argues a recent paper. The paper compared the criteria and standards regulators used to assess systemic banks and claimed that with stablecoins, the region was heavy-handed.
Under MiCA, a stablecoin is classified as significant or systemic if it meets any three of seven criteria, including having more than €5 billion (US$6.28 billion) in reserves, over 10 million users, or processing over €500 million daily. Other considerations include whether it’s interconnected with the financial system and if it’s used for payments on a global scale.
The report compares MiCA’s considerations to the regime applied to classify global systemically important banks (G-SIBs), or what was formerly known as “too big to fail.”
Terra Luna’s UST wiped out $40bn in value overnight (Lehman Brothers was worth $46bn), but without affecting financial markets at any level.
Raising the question: At what point do stablecoins become systemically important or in MiCA’s words, significant? https://t.co/T0bl7Suu8y
— Patrick Hansen (@paddi_hansen) February 14, 2024
The two authors—one of whom is the director of EU strategy at USDC issuer Circle Financial, while the other is a former BaFin executive—argue that G-SIBs are subjected to more favorable and nuanced considerations than stablecoins.
For instance, banks that fall under G-SIBs are substantially bigger than the stablecoin issuers. The smallest G-SIB is Standard Chartered (NASDAQ: SCBFF), whose total asset value at the end of 2022 was $855 billion. Additionally, some nuance is applied, with Standard Chartered and other similarly-sized banks bundled in the smallest of five buckets, with JPMorgan (NASDAQ: JPM) on the other end of the spectrum.
In contrast, with stablecoins, hitting a mere €5 billion threshold attracts significantly increased prudential requirements.
“Whatever risk the significance concept under MiCA is meant to capture on the basis of the €5 billion size threshold, it appears highly unlikely that evidence can be provided, now or in the future, of a systemic threat to EU, let alone global, financial stability emanating from [a stablecoin] of that size,” the authors argue.
MiCA’s disconnect with the actual stablecoin dynamics can be partly blamed on Libra, the failed stablecoin project by Meta (NASDAQ: META). Libra caught European regulators unaware, and they aggressively put up roadblocks to ensure it didn’t launch.
Since then, they have subjected every stablecoin to Libra standards. By their estimation, Libra’s assets under management would have been at least €152.7 billion ($163.6 billion) if used only as a means of payment. If the stablecoin crossed over to the ‘store of value’ territory, its assets would have been around €3 trillion ($3.2 trillion).
The authors proposed revising the stablecoin significance regime under MiCA, or else it could “harm the EU’s goal to bring large parts of this market under its regulatory remit in order to protect consumers.”
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