EU bank agency chief advocates for diverse stablecoin reserves

José Manuel Campa from the European Banking Authority (EBA) urged crypto market players to start adjusting their operations now.

The new rules passed by the E.U. last week emphasize the need for market players to comply with the regulations and make necessary preparations for the upcoming changes.

The governance of stablecoins

The European Banking Authority‘s chairman since March 2019, José Manuel Campa, has written an article for think tank Eurofi about forthcoming European Union rules that will govern stablecoins. 

The rules, known as the Markets in Crypto Assets (MiCA), are set to take effect next year, and they will focus on ensuring stablecoin issuers have diverse reserves, manage conflicts of interest, and do not transmit risks to other players.

Campa has stressed the importance of crypto market players adjusting their operations in response to MiCA now, as his agency will play a key role in implementing the laws by drafting more details.

One of the requirements under MiCA is for stablecoin issuers to have enough reserves to manage turbulence, with a special emphasis on diversification of the deposit component of the reserve. 

The spark for diversity

The collapse of algorithmic stablecoin terraUSD in 2022 caused regulators to reevaluate the governance of cryptocurrencies that are pegged to the U.S. dollar or other stable assets.

The weekend of May 7, 2022, Terraform Lab’s TerraUSD stablecoin, also known as “UST”, experienced a significant drop from its $1 peg to just a few pennies.

TerraUSD was previously one of the top three largest stablecoins by market share, and the sudden drop resulted in investors losing over $18 billion that had been invested in the cryptocurrency.

When combined with the value of Luna, Terra’s native token, the loss totaled over $40 billion.

As a result, regulators are now considering how to ensure the stability of algorithmic stablecoins and prevent similar incidents in the future. 

Later, the collapse of a well-known trading platform, FTX, also sparked debate in the industry about the need for more regulation.

Martin Moloney, secretary-general of the International Organization of Securities Commissions, expressed concerns about the lack of transparency in the corporate structures, business models, and exposures of the main crypto market players, citing that it is compounded by the market concentration among the three largest trading platforms. 

Moloney’s comments came ahead of the organization’s publication of a consultation on crypto standards that will be finalized later in the year.