MiCA Regulation: A Fatal Blow To Stablecoins And The Future Of Crypto!

The new MiCA (Markets in Crypto-Assets) regulation from the European Union promises to deeply shake the crypto universe. As the legislative framework is set to come into force by the end of the year, industry figures, like Tether’s CEO Paolo Ardoino, express their concerns. According to him, the banking reserve requirements imposed on stablecoins could threaten the stability of the sector and create unprecedented systemic risks.

Restrictive Banking Requirements: A Time Bomb

The MiCA directive requires stablecoin issuers to keep at least 60% of their reserves in European banks. This figure may seem reasonable on the surface, but it could have worrying repercussions.

Indeed, banks are allowed to lend up to 90% of their reserves. As a result, most of the funds deposited by stablecoin issuers would be de facto redistributed in the form of loans, making these funds less liquid in case of immediate need.

Paolo Ardoino, at the helm of Tether, does not hesitate to warn against what he calls a “systemic risk.” According to him, if a struggling bank were to declare bankruptcy, only weak guarantees would allow for the recovery of a fraction of the deposited funds. This poses a real security dilemma for stablecoins, which are supposed to be as reliable as the dollar or the euro.

This case is not theoretical: in March 2023, the USDC stablecoin lost its parity with the dollar due to funds being blocked at Silicon Valley Bank. This precedent highlights the vulnerability of stablecoins to banking risks.

A Stability of Stablecoins in Peril

In addition to raising questions about banking stability, MiCA also threatens the stability of stablecoins themselves. Indeed, if reserve funds are largely illiquid, stablecoin issuers may find themselves unable to maintain parity with fiat currencies. Users would then lose trust, which would severely harm the crypto market.

To counter this threat, some issuers are considering diversifying their reserves by investing in government securities or bonds, in order to ensure immediate liquidity in case of banking failure. However, even this solution does not fully resolve the problem as it remains subject to the whims of financial markets.

Faced with this pressure, many companies may simply choose to avoid the European regulatory framework.

Experts believe that MiCA could prompt some crypto players to relocate to more flexible regions, such as the Middle East. This flight would weaken the European blockchain ecosystem, reducing innovation and limiting opportunities for local startups.

In conclusion, MiCA’s requirements, although aimed at financial protection, risk having the opposite effect for the crypto sector in Europe. For stablecoins, the challenge of staying true to their promise of stability is intensifying – and the question arises: will Europe succeed in adapting its regulation to avoid a massive exodus of crypto players? In the meantime, The Trump effect boosts crypto investments.