The European Central Bank is advocating a European Union ban on multi-issuance stablecoins, which would upset large players, including Circle and Paxos.
Regulators have supported the proposal, suggesting that there may be a conflict in managing cross-border stablecoin operations.
The European Systemic Risk Board has recently issued a recommendation to limit stablecoin issuance, a move aimed at ensuring financial stability in Europe. Although there might be no legal binding power, the guidance is likely to pressure EU authorities to either enforce the measure or justify how risks may be mitigated without a ban.
ECB’s stance on stablecoin risks
Stablecoins consist of digital funds pegged to a reference asset, such as the US dollar, and secured by cash or other equivalent assets. With the multi-issuance model, licensed providers can issue the same tokens in multiple jurisdictions while maintaining cross-border reserves. According to the ECB, this model raises concerns about the financial stability of the EU.
The recommendation was strongly advocated by Christine Lagarde, who is the President of the ECB and the leader of the General Board of the ESRB. Although alternative safeguards were discussed, the ESRB determined that they were not as effective in mitigating risks. Both ECB and ESRB refused to comment on the in-house debates.
Impact on Circle and Paxos
Firms that already have a license under this model are uncertain about the repercussions of a possible ban. Some of the essential issuers are Circle, controlled in France, and Paxos, which is controlled in Finland. Each of the two companies is headquartered in the United States, where stablecoins are subject to more favorable regulation.
They keep their reserves mostly in dollar-based assets, such as US government debt, which has caused concern among European regulators. Critics argue that this dependence on US-based reserves is undermining the EU’s efforts to establish its own financial autonomy. Paxos and Circle had no comment on the matter.
Concerns over euro sovereignty and MiCA credibility
Since 2021, the ECB has been exploring the introduction of a central bank digital currency (CBDC) linked to the euro. The authorities have been continually alarmed that any foreign-backed stablecoin would undermine monetary sovereignty in the bloc. Lagarde has highlighted the fact that holding large stocks of dollar-pegged tokens would pose liquidity and operational problems in the EU.
Recently, the ECB observed that the reserves of non-EU issuers are usually invested outside the bloc. This weakens its drive to a stronger European Savings and Investment Union. The Bank of Italy has also urged the European Commission to clarify whether cross-border stablecoins are subject to legal regulation.
According to Judith Arnal of the Bank of Spain, the current debate casts doubt on the credibility of the EU’s landmark MiCA framework. She cautioned that the conflicts between institutions in the EU would send a bad signal to world markets. The ESRB has a sitting European Commission, which has not taken an official stand.
