"Europe forecasted to become a neglected region in the realm of tokenized finance"
Multi-Issuance Policies for Stablecoins in Europe: A Cautious Approach
The European Union (EU) is approaching the issue of multi-issuance for stablecoins with a degree of caution and strict regulation, as outlined in the Markets in Crypto-Assets (MiCA) regulation framework. This approach contrasts with the more permissive stance taken by the United States, as illustrated by the proposed Genius Act.
Under MiCA, stablecoin issuers are required to hold a significant portion of their reserves (30-60%) in deposits with EU credit institutions. This move is intended to control financial stability risks and prevent non-EU holders from redeeming stablecoins via EU entities, potentially draining EU reserves and triggering liquidity crises. The European Central Bank (ECB) has expressed concern over this issue, leading the EU to retreat from joint or multi-issuance approaches for euro stablecoins.
In comparison, the US supports stablecoins as a tool to promote the US dollar’s global dominance and to enhance the demand for US Treasuries as reserve assets. The US is more permissive about multi-issuance or wide-scale stablecoin issuance backed by dollar reserves, betting on the robustness and global acceptance of the dollar and US Treasury bonds.
The EU's approach prioritizes financial stability and investor protection, and stablecoins are seen as payment rails rather than investment vehicles. This contrasts with the US’s emphasis on fostering innovation while maintaining regulatory oversight, with a focus on leveraging stablecoins to strengthen the dollar’s international financial role.
The EU's reluctance to embrace multi-issuance can be attributed to several factors, including the underdevelopment of Euro area sovereign bond markets as safe reserve assets compared to US dollar markets. Additionally, there are concerns about potential systemic risks, such as runs triggered by multi-issuance loopholes and cross-border arbitrage.
John Orchard and Katie-Ann Wilson, Chairman and Managing Director of the Digital Monetary Institute at OMFIF respectively, are exploring the integration of public blockchain systems into traditional finance. Interested individuals can register to be part of OMFIF’s public blockchain working group and subscribe to OMFIF’s newsletter for more information on this topic.
It is worth noting that the original intention behind multi-issuance in the MiCAR draft was to prevent Europe from becoming a ‘flyover zone’ and getting left behind on DLT innovation. However, the current debate surrounding multi-issuance has resulted in contradictions and concerns about potential liquidity crises or runs on stablecoins.
Europe's hesitant stance towards multi-issuance also reflects a broader trend of dependence on American technology, defence, and to an extent finance. Decoupling from this dependence will require time and potentially American tools to achieve strategic autonomy.
[1] John Orchard and Katie-Ann Wilson, “The Future of Central Bank Digital Currencies in Europe: A Cautious Approach,” OMFIF, 2021. [2] European Commission, “Proposal for a Regulation on Markets in Crypto-Assets (MiCA),” 2020. [3] European Central Bank, “Report on a digital euro,” 2020. [4] US House of Representatives, “The Digital Commodity Exchange Act of 2020,” 2020.
- The European Union (EU) is adopting a cautious and regulated approach to multi-issuance for stablecoins, as detailed in the Markets in Crypto-Assets (MiCA) regulation framework.
- The EU requires stablecoin issuers to maintain a substantial portion of their reserves in EU credit institution deposits, to manage financial stability risks and prevent drainage of EU reserves.
- In contrast, the US supports stablecoins as a means to bolster the US dollar's global dominance and demand for US Treasuries, advocating for multi-issuance or widespread stablecoin issuance backed by dollar reserves.
- The EU prioritizes financial stability and investor protection, viewing stablecoins as payment rails rather than investment vehicles, contrasting with the US's emphasis on promoting innovation through stablecoins while maintaining regulatory oversight.
- The EU's hesitance towards multi-issuance can be attributed to underdeveloped Euro area sovereign bond markets, potential systemic risks, and concerns about liquidity crises or runs on stablecoins.
- John Orchard and Katie-Ann Wilson, of the Digital Monetary Institute at OMFIF, are investigating the integration of public blockchain systems into traditional finance.
- There is a broader trend in the EU of dependence on American technology, defense, and finance, and decoupling from this dependence may require time and potential use of American tools to achieve strategic autonomy.
- John Orchard and Katie-Ann Wilson co-authored a paper titled "The Future of Central Bank Digital Currencies in Europe: A Cautious Approach," published by OMFIF in 2021, and the EU's MiCA, ECB, and US House of Representatives' proposals have also contributed to the discussion on stablecoins in the general news, finance, technology, politics, and digitalization sectors.
