Bank run on Stablecoins might happen, says EU regulator

Simar Marwaha
Simar Marwaha
Published on May 25, 2023 05:33 PM

The ESRB recommends strengthening the European Union's capacity to monitor the cryptocurrency market and the ties between it and the larger financial sector.

Bank run on Stablecoins might happen
Source: Adobe Stock

As the crypto business continues to create mutually beneficial relationships with traditional finance, the risks presented by a sudden crisis in the former to the world economy are increasing. The European Systemic Risk Board (ESRB) holds this view and recommends for further supervision of the market for digital assets. 

The European Central Bank's monitoring authority, the ESRB, released a study on crypto assets and decentralized finance (DeFi) on May 25. The 77-page report's core argument is that the volatile cryptocurrency market is expanding and becoming more intertwined with traditional financial markets. Even if the 2022 crypto shocks didn't do as much harm in TradFi, the framework in place to manage risks is insufficient to keep an eye on worrying trends in the years to come.

EU regulator warns that a bank run on stablecoins may occur

The risks posed by a sudden crisis in traditional banking to the global economy are rising as the crypto industry continues to forge positive partnerships with it. This is the opinion of the European Systemic Risk Board (ESRB), which advocates for increased market oversight.

On May 25, the ESRB, the watchdog of the European Central Bank, published research on crypto assets and decentralized financing (DeFi). The main contention of the 77-page paper is that the volatile cryptocurrency market is growing and becoming increasingly entangled with conventional financial markets. Even while TradFi was less severely affected by the 2022 crypto shocks, the structure in place to manage risks is not adequate to keep an eye on unsettling tendencies in the years to come.

The ESRB suggests enhancing the ability of the European Union to keep an eye on the cryptocurrency market and the connections between it and the wider financial industry. The EU should encourage standardized disclosure reporting from banks and investment institutions that deal with cryptocurrencies, the research suggests.

Stablecoins are given particular emphasis in the paper. One of the dangerous, speculative situations it mentions is a "run on a reserve-backed stablecoin." This makes sense considering that stablecoin reserves might be made up of stocks, bonds, fiat currencies, and other traditional assets, both public and private. The ESRB brings up the issue of stablecoin transparency and cites Tether USDT as an example. Tether USDT has a market valuation of $83 billion despite having little facts available about its reserves.

ESRB also points out that there are no regulations for so-called "crypto-asset conglomerates" in the planned Markets in Crypto-Assets law. According to the ESRB, conglomerates are cryptocurrency businesses like Binance that conduct a variety of operations under one roof, including custody and trading. The watchdog wants regulators to "study" crypto asset conglomerates since combining activity carries dangers.

Such suggestions are nevertheless gentler than the calls for the prosecution of joint crypto activities, which are typical of American regulators. Let us see how this act affects future crypto regulation. 




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