The European Central Bank (ECB) and national central banks across the European Union are advocating for a ban on crypto platforms offering products like lending, borrowing, and staking that generate indirect yields from stablecoins.
In a recent response to the European Commission regarding the review of the Markets in Crypto-Assets regulation (MiCA), the European System of Central Banks (ESCB) emphasized that electronic money is meant for transactions, not savings. They reiterated their support for prohibiting crypto-asset service providers (CASPs) from providing returns on stablecoins and suggested that this prohibition should extend beyond the scope of MiCA, which is set to take effect in June 2024, to include unregulated activities.
The central banks argued that allowing yield-generating mechanisms could blur the lines between electronic money and traditional bank deposits, leading to unfair competition within the EU financial landscape. The ESCB stated, "Maintaining and, where necessary, strengthening the prohibition, covering both direct and indirect forms of remuneration, should be a clear legislative priority."
This position mirrors concerns raised in the U.S. regarding the Clarity Act, where banking groups pushed for tighter restrictions on stablecoin rewards to prevent competition with bank deposits. The Clarity Act ultimately failed to pass in the Senate.
The ECB noted that stablecoins could be converted into yield-bearing instruments through various mechanisms, circumventing existing regulations. To address this, they proposed eliminating MiCA’s requirement for stablecoin issuers to maintain a portion of their reserves in bank deposits, arguing that it could lead to vulnerabilities during bank runs. Currently, issuers must keep 30% to 60% of reserves in deposits, depending on the stablecoin's significance.
Instead, the ESCB recommended that issuers hold a percentage of reserves that mature within one to five working days, shifting the focus from where reserves are held to how quickly they can be accessed. They highlighted that large stablecoin deposits could pose risks to banks if issuers require quick access to funds for redemptions.
The central banks referenced draft standards from the European Banking Authority, which suggest that significant stablecoins should maintain at least 40% of reserves in assets maturing within one day and 60% within five days, while non-significant stablecoins would have lower thresholds of 20% and 30%, respectively.