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Stablecoin Reserves Need to Be Diverse, EU Bank Agency Chief Says

Adrian Petty

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Forthcoming European Union rules to govern stablecoins will focus on ensuring issuers have diverse reserves, manage conflicts of interest and don’t transmit risks to other players, José Manuel Campa, chairman of the European Banking Authority, wrote in article for think tank Eurofi.

The bloc’s Markets in Crypto Assets rules, known as MiCA, are set to take effect next year, but crypto market players should start adjusting their operations now, said Campa, whose agency will play a key role in implementing MiCA by drafting more details of the laws. MiCA was passed by the European Union last week.

MiCA requires issuers of stablecoins to have enough reserves to manage turbulence – and “the EBA will be paying special attention to diversification of the deposit component of the reserve,” Campa wrote.

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Campa highlighted the importance of stablecoin issuers mitigating conflicts of interest, and mapping connections to custodians and trading platforms, to ensure risks don’t ricochet within the crypto ecosystem.

Although the law, which licenses wallet providers and exchanges, isn't yet formally etched into the statute book, the “contours of MiCA are, by now, familiar and I would encourage market participants to already adjust their operations” to ensure sound risk management, Campa said.

The collapse of algorithmic stablecoin terraUSD last year prompted regulators to consider how to govern the cryptocurrencies that are pegged to the U.S. dollar or another stable asset.

The November collapse of crypto exchange FTX and revelations of its murky relationship with Alameda Research, an affiliated trading firm, also drew attention to risks posed by large and often complex crypto conglomerates.

“The corporate structures, business models and exposures of the main crypto market participants are not transparent,” Martin Moloney wrote for Eurofi. Moloney is secretary-general of the International Organization of Securities Commissions, which is soon set to publish a consultation on crypto standards that will be made final later in the year.

The risk “is exacerbated by evident market concentration with the three largest so-called trading platforms,” Moloney added.

Read more: European Banking Regulator Calls Attention to Digital Ledger Technology