Europe's financial regulators are moving to reshape how stablecoin issuers hold reserves. The European System of Central Banks, which includes the European Central Bank and national central banks across the EU, has recommended replacing the mandatory allocation of stablecoin reserves to commercial-bank deposits with requirements focused on short-maturity assets, according to reporting from September 22.
Current EU rules under the Markets in Crypto-Assets regulation require stablecoin issuers to keep at least 30% of reserves in commercial-bank deposits, rising to 60% for significant tokens. The central banks' proposal would change where issuers must keep redemption money while keeping MiCA's existing requirements in force.
The timing aligns with Britain's regulatory approach. On the same day, the Bank of England's consultation deadline arrived for its draft systemic stablecoin Code of Practice. The Bank's June policy already ruled out commercial-bank backing due to financial, operational, and contagion risks, with plans to finalize the code by the end of 2026.
The Risk of Connected Financial Stress
The shift reflects a shared concern among regulators: holding stablecoin reserves in banks can create interconnected vulnerabilities between two financial systems.
When stablecoin reserves sit in commercial banks, the coin's ability to meet redemptions becomes tied to the bank's ability to return the money. Bank failure can undermine confidence in stablecoin reserves, as demonstrated when USDC lost its peg in March 2023 after some backing was held at the failing Silicon Valley Bank.
The risk flows in both directions. If stablecoin holders rush to redeem their coins, issuers may withdraw large deposits from banks to repay them. This sudden withdrawal of funding can strain banks precisely when confidence is weakening, potentially transmitting financial stress through the banking system.
The British Model as Alternative
Britain's framework offers a different structure. The Bank of England's policy allows systemic sterling stablecoin issuers to hold up to 70% in short-term UK government debt with no more than six months to maturity, with 30% in central-bank deposits that pay no interest. Eligible issuers can initially hold up to 95% in government debt as they scale.
This approach relies on central-bank deposits as a source of redemption cash, reducing exposure to commercial-bank credit risk. The regime includes financial risk reserves and a planned central-bank liquidity backstop to address the challenge of producing redemption cash under stress.
Implementation Path Forward
For the EU, implementing the central banks' recommendation would require legislative amendment to MiCA's statutory requirements. Until such changes occur, the current deposit allocation requirements remain in effect.
The comparison between the European and British approaches highlights a fundamental trade-off: avoiding commercial-bank credit exposure can leave issuers needing to convert securities into cash when holders demand redemptions. Short-dated securities can fluctuate in value or prove difficult to liquidate during periods of financial stress, making the accessibility and speed of reserve conversion critical to stablecoin stability.
