BRUSSELS — Battle lines are being drawn between the European Central Bank and the European Commission over whether landmark rules to govern crypto currencies are strong enough to withstand the full force of Donald Trump.
The ECB thinks the U.S. president’s lavish support for the American crypto sector risks causing financial “contagion” that could blow up the European economy, according to a policy paper seen by POLITICO. It is demanding an urgent rewrite of laws brought fully into force only four months ago.
But in a rebuff, the Commission dismissed the Bank’s alarmist analysis, signaling that it had misunderstood the EU’s own rules, and hit back at what it saw as an unwelcome intrusion into lawmaking.
The argument sheds light on how jittery financial policymakers generally are about moves by the Trump administration to “expand the reach of the dollar” via complex financial technology. European officials fret that several major financial market reforms the U.S president has touted will undermine efforts to become strategically independent as the EU tries to revamp its financial sector. They worry it will prompt a flight of assets to the U.S. and entrench fresh risks in the system.
This specific clash is about the Markets in Crypto Asset Regulation (MiCA), a landmark law passed in 2023 and heralded as the first regulation worldwide to introduce strong safeguards and consumer protections for cryptocurrency firms. Cryptocurrencies ― digital currencies that can be bought, sold and traded online ― look like being given a new lease on life under Trump, after the industry pumped billions of dollars into his election campaign.
STABLE, GENIUS
At the heart of the recent scuffle is anxiety regarding a popular kind of a cryptocurrency known as a “stablecoin,” which emulates the stability of major currencies like dollars and euros, unlike more volatile cryptocurrencies like Bitcoin. The majority of these stablecoins are denominated in dollars, and in some countries are already used as an easily accessible alternative to the greenback when local currencies are unreliable. Governments fear they could replace traditional money, undermining national sovereignty and leaving citizens vulnerable to the fortunes of a business with a penchant for disastrous meltdown.
In theory, MiCA reduces the risk of foreign-currency-backed stablecoins disrupting the European economy by limiting who can issue them and how much can be issued, while still allowing EU citizens to use them.
But planned reforms in the U.S., including a White House executive order and the drafting of two laws — dubbed STABLE and GENIUS — extend the reach of the American stablecoin industry, with one analysis by British bank Standard and Chartered predicting the supply of dollar-backed tokens could hit $2 trillion by 2028, up from $240 billion today. This has prompted panicked warnings from ECB President Christine Lagarde and its digital payments czar Piero Cipollone.
In recent months, both top officials have suggested that the MiCA rules are not strong enough to withstand the effects of a turbocharged U.S. stablecoin industry, worrying that a flood of dollar-denominated assets into Europe could reroute European savings into the U.S. On Thursday, Lagarde said MiCA would have to change, and implied that the unique threat posed by stablecoins was “understood” by the Commission and other EU institutions.
But Lagarde’ s audience did not know that her words came after an acrimonious exchange of barbed research papers earlier this month, which POLITICO can now reveal.
Fundamental misreading
The drama began on April 14 when the top financial service officials of EU governments met to discuss the impact of U.S. crypto assets on EU financial stability. Both the central bank and the EU’s executive circulated their own papers on the subject, underscoring the chasm between the institutions’ views on the risks coming from Washington.
The ECB argued that the regulation needs a serious rethink, warning it was too permissive toward the “multi-issuance” model, in which Europe-based stablecoin issuers pool their resources with issuers in third countries, according to the document.
The gulf between the institutions’ views turned into a clash during the meeting as EU officials and most governments pushed back against the central bank, according to two diplomats and one EU official, who were granted anonymity to speak freely about private talks.
“The Commission was quite clear that they had different views on this topic” and “not very many [countries] supported the idea that we should now jump the gun and start making quick changes in [the rules] based on this alone,” one of the diplomats said.
The EU official suggested that the ECB’s paper was based on a fundamental misreading of the MiCA regulation, which, the official said, had been designed explicitly to resolve the issues mentioned by the ECB. The official added that it made “no economic sense” for U.S. users to impose redemption requests on European issuers, and that the idea of a traditional “run” on an asset backed one-to-one was “nonsense.”
The official also claimed the ECB has recently been hyping the stablecoin menace to bolster political support for its controversial digital euro project, an effort to build a pan-European payment system that, it says, would shield Europe’s financial infrastructure from crypto-assets.
Stablecoins denominated in dollars, which are backed primarily by U.S. treasuries, account for 99 percent of the $240 billion market, according to Frankfurt. The central bank fears that allowing dollar-backed stablecoin issuers to offer their product in both the U.S. and the EU could also favor “existing non-EU stablecoin issuers who have already established an oligopolistic market position,” and could trigger a flood of EU investment in U.S. debt, undermining the bloc’s plans to strengthen its own financial market.
In the worst-case scenario, the ECB argued, EU issuers could be forced to redeem foreign-held tokens as well as European ones, risking a “run” on their reserves if either are found to be insolvent and potentially having a knock-on effect on exposed banks.
In its own paper, also seen by POLITICO, the Commission forcefully defended the effectiveness of the rules, even taking into account the planned U.S. reforms, hinting that the central bank was being melodramatic. “The risks arising from such global stablecoins seem to be overstated and are manageable under the existing legal framework,” the Commission said in the document.
The EU executive argued that it was still “too early” to judge what effect the U.S. crypto resurgence would have on EU markets. In any case, it said, the MiCA rules already require crypto asset providers to adhere to stricter criteria to operate in the EU market — and have already forced some major players to delist their stablecoins, including the well-known Tether, from exchanges. The Commission acknowledged, however, that those rules do require enforcement.
Still, the EU executive also noted that only a single global stablecoin has been authorized under the new rules so far. The bill allows the central bank itself to block such issuers from operating if “they pose a threat to smooth operation of payment systems, monetary policy transmission or monetary sovereignty,” it said.
Rules for banking already offer protection against potential contagion, while redemption rights can be limited to EU holders only, it said.
The post Commission livid as ECB warns of crypto apocalypse under Trump appeared first on Politico.
