New cryptocurrency regulation in the EU creates systemic risks for stablecoins: Tether chief’s opinion
On 20 April 2023, the European Parliament voted to pass the Markets in Crypto-Assets Act, also known as MiCA. The law will not come into force until 30 December this year. One of its key requirements was the need for issuers of stablecoins to hold at least 60 per cent of their reserve assets in European banks. Alas, just this measure may create notable risks for the stable-value token sphere. This is the opinion shared by Paolo Ardoino, CEO of the largest issuer of Tether.
What will happen to USDT in the future?
In an interview with Cointelegraph journalists, Ardoino said that banks are able to lend up to 90 per cent of their reserves. Well in the context of MiCA adoption, this could be a problem. Here’s a rejoinder on the subject.
If you have €10 billion in assets under management, you have to put €6 billion in cash deposits. That’s 60 per cent of the 10 billion. We know that banks can lend out 90 per cent of their balance sheet. So out of €6 billion, they will give people €5.4 billion in loans. Only €600 million will remain on the bank’s balance sheet.
The head of Tether, Paolo Ardoino, said
If there are few funds left in the bank, there is a risk that the issuer will not be able to settle in time with all the token holders who want to exchange them for real currency. Something similar happened in March 2023 with Circle, the issuer of the USDC steiblcoin.
Then, for a short time, Circle’s other popular USDC steiblcoin lost its peg to the dollar because the company failed to withdraw $3.3 billion from Silicon Valley Bank in time. Recall, at that time the bank was temporarily closed amid the banking crisis in the US.
Decoupling of USDC steiblcoin from the dollar exchange rate
When MiCA comes into effect, steiblcoin issuers will find themselves more dependent on banks. Ardoino continues.
You deposit €1 million into an account at a European bank that has a federal guarantee on deposits up to €100,000. That is, the money you send to the bank is guaranteed up to €100,000. If the bank goes bust and goes bankrupt, you get 100 thousand and the rest goes in the bankruptcy process.
Ardoino added that issuers of stablecoins under MiCA can protect themselves from potential bankruptcy with securities.
How do you protect yourself from that? You buy securities. If the bank goes bust and you have the securities, those securities are nominal. So they will come back to you and you just transfer them to another bank.
USDT capitalisation continues to set ever new highs
Some of the largest institutions are preparing hard for the upcoming MiCA implementation – including Societe Generale, the nineteenth largest banking group in the world by assets.
The bank is working with platform Bitpanda to launch a MiCA-compliant stablecoin, the euro-denominated EUR CoinVertible (EURCV).
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In addition to global concerns, Ardoino also touched on the topic specifically of Tether’s reserves. According to him, the company holds about $100 billion in US government bonds, 82 thousand BTC worth $5.8 billion at today’s exchange rate and 48 tonnes of gold.
Tether CEO Paolo Ardoino
The head of Tether didn’t just mention the numbers: on Friday 25 October, The Wall Street Journal published an article about the issuer allegedly being investigated by US government authorities for violating anti-money laundering laws.
Specifically, the Department of Justice is tentatively investigating Tether’s activity for possible violations of sanctions and anti-money laundering rules, while the Treasury Department is unhappy with USDT’s popularity among people and organisations already under government sanctions.
After the publication of the article, Ardoino denied the rumours and published the following sentence.
As we told the WSJ, there is no indication that Tether is under investigation. WSJ is retelling an outdated rumour.
The reserves of Tether, which issues the USDT stablecoin
Ardoino also emphasised that Tether is working with law enforcement to regularly recover stolen digital assets and freeze accounts with illegally obtained tokens.
We regularly and directly work with law enforcement to help prevent USDT from being used by hostile countries, terrorists and criminals. We would know if we were under investigation, as erroneously reported in the article. With this in mind, we can confirm that the claims in the article are unequivocally false.
Note that the negative news failed to bring down the USDT exchange rate. According to Kaiko analysts, the value of the token on the largest American platforms Coinbase, Binance and Kraken sagged to a local minimum of $0.994. Accordingly, its stability is still enviable.
Collapse of the USDT exchange rate in response to the publication of the news from WSJ
Since 2014, Tether has helped law enforcement agencies recover about $109 million used in illegal activities. However, the day before, Ardoino also criticised crypto regulation policies in the US for lagging behind other countries.
Because of this, some innovative cryptocurrency companies have moved out of the country to more favourable jurisdictions. At the same time, the CEO of Tether expressed confidence that the situation will change after the US presidential elections in 2024. They will be held on 5 November, that is already next week.
Paolo Ardoino's comments make it clear that even the new bases for cryptocurrency regulation are not without flaws. However, the clause in MiCA regarding stablecoins is understandable. Still in this way the government wants to reduce risks and dependence on financial institutions in other regions.
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