The European Union needs to close a loophole in its legislation governing stablecoins or risk importing a major risk to financial stability, European Central Bank President Christine Lagarde said on Wednesday.
In opening remarks to the European Systemic Risk Board’s annual conference, Lagarde urged legislators to improve its current regulation on digital currencies to address risks posed by so-called multi-issuance schemes, under which an EU entity and a non-EU entity jointly issue fungible stablecoins.
“In the event of a run, investors would naturally prefer to redeem in the jurisdiction with the strongest safeguards, which is likely to be the EU,” Lagarde said. The EU’s Markets in Crypto-Assets Regulation (MiCAR) requires immediate and cost-free redemption at par, which is not the case in the United States.
“But the reserves held in the EU may not be sufficient to meet such concentrated demand,” Lagarde cautioned, adding that new stablecoins create very familiar liquidity management risks.
“That is why we must take concrete steps now,” Lagarde said. “European legislation should ensure that such schemes cannot operate in the EU unless supported by robust equivalence regimes in other jurisdictions and safeguards relating to the transfer of assets between the EU and non-EU entities … We know the dangers. And we do not need to wait for a crisis to prevent them.”
Outsiders have also warned of the risks latent in the current setup. In a recent op-ed, London Business School Professor Richard Portes said: “This is like allowing depositors in a bank outside the bloc to redeem their deposits held in the third country through its EU subsidiary. This would mean the European supervisors of an EU subsidiary of a large global banking group would be responsible for the solvency and liquidity of the entire group.”
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