According to a recent report by Bloomberg, the European Systemic Risk Board (ESRB) is in favor of banning multi-issuance stablecoins amid fears that dollar-backed tokens could undermine the euro.
Even though the recommendation is non-binding, the ESRB's stance has significant political weight.
This could ultimately push popular stablecoin issuers, such as Circle and Paxos, to restructure the way they issue and operate their reserves.
Multi-issuance stablecoins, explained
Multi-issue stablecoins are those tokens that are issued as a single token that is managed by various legal entities. For instance, a product can be licensed by the EU and a non-EU entity. Hence, users of such stablecoins end up holding identical tokens while their reserves are split between different jurisdictions.
If EU holders try to seek redemption in the EU en masse, this could cause a liquidity shortfall since only a fraction of the total backing might be located within the jurisdiction. The fact that large stablecoins are backed by dollar-denominated cash or U.S. Treasuries raises market-access risks for the EU.
There are also concerns about significant legal fragmentation since there are different oversight standards. The ESRB recognized this as a system vulnerability.
Circle and Paxos under threat?
Big issuers like Circle and Paxos could be directly affected by the new ban if it gets implemented, and there will likely be a lobbying effort to push for carve-outs.
As a possible solution, they could potentially re-house some reserves in EU banks.
Alternatively, they could issue separate tokens for Europe, but this would substantially fragment liquidity.
If nothing works, these firms could be forced to scale back services in the EU.
Dan Burgin
Vladislav Sopov
U.Today Editorial Team