ECB Chief Calls for Stricter Rules on Non-EU Stablecoins

Highlights:

• The President of the ECB urges EU and non-EU stablecoin issuers to follow strict reserve rules.
• Weak oversight and mixed issuances could create loopholes, increasing investor redemption risks.
• Global stablecoin developments, including the U.S., EU, and China, raise financial system concerns.

Christine Lagarde, president of the European Central Bank (ECB), stated that stablecoin issuers outside the European Union should meet the same strict reserve rules as those inside the EU. She emphasized that this approach is needed to reduce the risks of sudden withdrawals and instability. While addressing the annual European Systemic Risk Board conference on Wednesday, Lagarde highlighted that the EU’s current Markets in Crypto-Assets (MiCA) framework still leaves important gaps, particularly in its treatment of stablecoin issuers.

Lagarde Urges Stronger EU Rules to Protect Investors from Stablecoin Risks

Lagarde explained that EU rules force stablecoin companies to keep enough money in banks so investors can always get back the same amount they put in. But she warned there’s still a risk when stablecoins are issued by both EU and non-EU companies together. In that case, only the EU part must follow the strict rules, while the non-EU part may not, which could create loopholes.

She said:

Lagarde stressed that Europe needs laws to stop these kinds of schemes unless other countries have equally strong rules. She emphasized that companies must follow clear safeguards when moving assets between EU and non-EU firms. Lagarde added that working together internationally is very important because, without fair global rules, risks will always find the weakest place to happen. MiCA, effective since last year, sets rules for crypto issuers and service providers in the EU.

Global Stablecoin Moves Raise Concerns Over Oversight and Market Risks

While the U.S. plans new stablecoin regulations and Europe debates its strategy, China is exploring a digital yuan-backed coin. Reports from August suggested that the Chinese government is considering a stablecoin tied to the renminbi, following the slow rollout of its digital yuan. As of Monday, officials had not confirmed whether they would launch a state-backed stablecoin, which could be a response to U.S. efforts to strengthen the dollar’s global role.

Nobel economist Jean Tirole warned that regulators do not closely monitor stablecoins. He said governments could face multibillion-dollar bailouts if these tokens fail during a financial crisis. In an interview with the Financial Times, Nobel laureate Jean Tirole expressed deep concern over the insufficient oversight of stablecoins. He warned that if investors began doubting the reserves supporting these digital tokens, a rush to redeem could happen, creating serious risks for the financial system. 

Stablecoins issued by firms such as Tether and Circle, which are backed by real-world assets, are expected to gain more popularity following a U.S. law passed in July. This law now allows banks to create their own digital assets linked to the U.S. dollar, potentially increasing adoption and market activity.

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