The European Systemic Risk Board (ESRB), a European Union watchdog, is advocating for a ban on multi-issuance stablecoins, citing concerns that these digital assets could undermine the euro. While the ESRB's recommendation is non-binding, it carries significant political weight and could prompt stablecoin issuers to restructure their operations. The European Central Bank (ECB) is also pushing for stricter regulations on multi-issuance stablecoins, expressing fears that the rapid expansion of these assets could trigger financial instability if not properly overseen.
Multi-issuance stablecoins are tokens issued as a single asset but managed by various legal entities, potentially in different jurisdictions. This arrangement can lead to complications, such as reserve mismatches and redemption issues, particularly if a large number of EU holders seek redemption within the EU. Because the reserves are split between different jurisdictions, liquidity shortfalls could occur if only a fraction of the total backing is located within the EU.
A significant concern is that many large stablecoins are backed by dollar-denominated assets, posing market-access risks for the EU. The ESRB has identified this as a systemic vulnerability, further complicated by differing oversight standards across jurisdictions. The ECB is also worried about regulatory gaps for stablecoins issued by non-EU entities and emphasizes the need for foreign stablecoin providers to align with EU standards to prevent inconsistencies in multi-jurisdictional operations.
The proposed ban could significantly impact major stablecoin issuers like Circle and Paxos. These companies might need to re-house some reserves in EU banks or issue separate tokens for Europe, which could fragment liquidity. If these solutions are not viable, these firms may have to scale back their services within the EU. The ECB's call for tighter rules aims to address financial risks and regulatory gaps associated with these digital assets. They are advocating for stricter oversight on foreign stablecoin issuers to close regulatory loopholes and ensure equivalence in standards.
The future of the proposed ban remains uncertain, pending support from authorities and lawmakers. The regulatory landscape is further complicated by the fact that major stablecoins like Tether (USDt) are pegged to the U.S. dollar. Despite these challenges, EU authorities are exploring the possibility of launching a digital euro. The ECB believes that a digital euro, alongside physical cash, could play a crucial role in maintaining Europe's financial resilience in the digital age. EU member states might reach an agreement on a digital euro by the end of the year, with a potential launch in 2029.
