The European Systemic Risk Board (ESRB), an independent body responsible for monitoring and assessing systemic risks in the EU’s financial system, has called for an “urgent policy response” to address vulnerabilities in multi-jurisdictional stablecoins, as well as warning of a general “elevated” risk due to ongoing geopolitical uncertainty.
In an October 2 statement, the finance watchdog stressed that “third country multi-issuer schemes – with fungible
stablecoins issued both in the EU and outside – have built-in vulnerabilities which require an urgent policy response.”
The notice comes after the 59th meeting of the ESRB General Board, held in September. As part of the meeting’s outcome, the board, chaired by European Central Bank (ECB) President Christine Lagarde, also noted that “multi-function groups may operate under regulatory regimes which are much more lenient than for financial conglomerates, raising the question of divergent prudential standards.”
In other words, the ESRB is concerned that other jurisdictions don’t have as strong regulatory standards as the EU. So stablecoins whose issuance crosses borders may present a heightened risk.
The EU finance watchdog praised the bloc’s own standards, noting that the EU had applied stablecoin safeguards in its landmark Markets in Crypto-Assets (MiCA) regulation—the stablecoin provision of which came into force last June—as well as implementing the Financial Stability Board (FSB) recommendations on global stablecoins.
However, due to the risk of multi-issuance schemes, suggested measures may no longer be sufficient, a situation exacerbated by ongoing political uncertainty in certain non-EU countries.
“In line with past reflections on the dependencies of the EU financial system on third countries, members took note that the current geopolitical environment has the potential to test the resilience of our financial system,” said the ESRB.
Additionally, it highlighted a general increase in risk related to the digital asset space, noting that “over the past three months, global risk appetite has increased, leading to record-high asset valuations that appear increasingly misaligned with the underlying macroeconomic outlook.”
The finance watchdog did not specify exactly which assets it was referring to, but the comment coincides with the global stablecoin market breaking the $300 million (market cap) threshold last week, according to data from open-source aggregator DefiLlama.
Some of these are not new concerns. Following the previous General Board meeting of the ESRB, held on June 24 and 26 of this year, the ESRB warned that “the growing links between the crypto sector and the financial sector needed to be closely monitored.”
To address the challenge of this elevated risk, the finance watchdog announced that it will publish a report on stablecoins, crypto-investment products, and multi-functional groups in the coming weeks.
EU stablecoin regime
The EU’s MiCA regulatory framework came into force last year, with the stablecoin provisions taking effect on June 30, followed by the remaining requirements related to crypto asset service providers (CASPs) at the end of December 2024.
MiCA brought with it a range of new obligations for stablecoins, including requiring issuers to be authorized by the ‘National Competent Authority’ (NCA) of the member state—usually the national central bank or financial supervisory authority—and to publish a white paper containing information on the relevant token for investors; new conduct and governance requirements around marketing, disclosure of information, and dealing with conflicts of interest; and prudential requirements to ensure sufficient liquidity and the ability to meet redemption requests.
Issuers of fiat-backed stablecoins (what the EU refers to as e-money tokens, or EMTs) are also required to comply with
existing EMD 2 obligations—the second electronic money directive, developed to align EU requirements and supervise electronic money institutions—which includes informing authorities on how they safeguard funds received in exchange for e-money issued, ensuring they can “redeem at any moment and at par value” the monetary value of the e-money held, e-money institutions must have initial capital of not less than EUR 350,000 at the time of authorization, and e-money institutions are subject to anti-money laundering legislation.
Some stablecoins may also be considered “significant” due to their size or other factors and, as a result, may present an increased systemic risk. A stablecoin is classified as significant or systemic if it meets any three of seven criteria, such as having more than €5 billion (US$6.28 billion) in reserves, over 10 million users, or processing over €500 million ($616 million) daily.
For these stablecoins, MiCA imposes measures comparable with the regime applied to classify global systemically important banks, such as enhanced capital and liquidity requirements, stricter governance frameworks, and intensified stress testing obligations. It also gives the EBA supervisory responsibilities for issuers of these systemic tokens, enforcing more rigorous stress testing and oversight.
In its October 2 statement, after the recent 59th General Board meeting, the ESRB also highlighted that the EU had fully implemented the FSB recommendations on global stablecoins.
The FSB—an international body that monitors and makes recommendations about the global financial system—published its ‘High-level Recommendations for the Regulation, Supervision and Oversight of Global Stablecoin Arrangements’ in July 2023.
Notable recommendations for the oversight of these “global stablecoins”—tokens that have, or could have, widespread adoption across multiple countries and could therefore impact the global financial system—included that authorities should use the “appropriate powers and tools, and adequate resources, to comprehensively regulate, supervise, and oversee” them.
According to the FSB, authorities should also require that global stablecoin arrangements have robust frameworks, including systems and processes for collecting, storing, safeguarding, and accurately reporting data. In addition, it suggested that regulators should have access to the data “as necessary and appropriate to fulfil their regulatory, supervisory and oversight mandates.”
Another recommendation was that authorities require issuers to provide all users and relevant stakeholders with comprehensive and transparent information, helping them to understand the functioning of the stablecoin. This should include the governance framework, management, redemption rights, stabilization mechanism, and risk management framework.
The ESRB said it was satisfied that these, and other recommendations of the FSB, had been imposed on the stablecoin market in the EU, but that the recent increased levels of systemic risk related to the area require comparable vigilance.
However, until its promised report is published, it is unknown what new measures, if any, the ESRB will recommend.
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Watch | Cut Costs & Streamline Payments: The Case for Stablecoins
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Source: https://coingeek.com/eu-warns-of-systemic-risk-of-inflated-stablecoin-market/
