With a market valuation of $173.22 billion, stablecoins represent one of the most significant innovations on blockchain, following Bitcoin. They have evolved into a “systemically important” sector, as issuers have become the 18th largest holders of U.S. treasuries alongside sovereign investors.
However, regulations in Switzerland and the EU are compelling stablecoin issuers to alter their business models, inadvertently increasing consumer risk due to stringent cash reserve mandates and limitations on issuers’ ability to hold bearer bonds.
Switzerland’s Impact on the Stablecoin Market
In a particularly alarming development in Europe, the Swiss Financial Market Supervisory Authority (FINMA), in its updated guidance from July 28, classified stablecoin issuers as financial intermediaries, rendering them subject to Know Your Customer regulations.
As a result, Tether, which holds 75% of the stablecoin market share, is now mandated to collect identifying details from users, a requirement that was previously absent.
Previously, anyone could possess stablecoins—even in cold wallets as intended by Satoshi. Swiss authorities are now infringing on individuals’ rights to own stablecoins in a pseudonymous manner.
Related article: FINMA Proposes New Guidelines For Stablecoins
MiCA’s Euphoria Turns to Uncertainty
This uncertainty stretches beyond Switzerland, permeating the broader European landscape. Stablecoins face threats not only from Swiss authorities but also from EU officials as the Markets in Crypto Assets (MiCA) legislation, once hailed by the digital asset industry, has now become a source of confusion.
MiCA is set to significantly impact the issuance, functioning, and regulation of stablecoins within the economic bloc.
There are concerns that MiCA might categorize stablecoins as potentially creating systemic risks, fundamentally changing stablecoin operations. This could prompt an exodus from the EU to more favorable jurisdictions, such as the U.S.—a move that gained traction after Former President Donald Trump promised to support the “safe and responsible expansion of stablecoins” during his Bitcoin 2024 address in Nashville.
If regulators classify stablecoin issuers as financial intermediaries, the process of issuing these coins could become excessively intricate due to new and rigorous regulations. Tether, boasting a market cap of $115 billion at the time of this writing, is currently engaged in discussions with European regulators concerning cash reserve requirements, as shared by its CEO Paolo Ardoino.
Cash Capital Reserves Versus Bearer Bonds
Concerns within the stablecoin industry largely stem from potential EU mandates for cash capital reserves. According to Ardoino, the regulator seeks to institute cash deposit requirements.
“If a bank fails, uninsured cash becomes part of the bankruptcy process,” Ardoino stated on X. “Stablecoins ought to maintain 100% of reserves in treasury bills instead of risking bank failures by holding large sums in uninsured cash deposits. In the event of a bank collapse, securities revert to the rightful owner.”
A significant portion of USDT in circulation is backed by US Treasuries. Stablecoin issuers argue that to maintain value, their reserves must consist of high-quality, liquid, and overcapitalized assets. It appears that FINMA aims to undervalue issuers by enforcing cash reserves that may depreciate and become tied up in bankruptcy proceedings, as opposed to holding bearer instruments.
Global digital asset exchanges are attentive to the regulatory advancements in the EU and other European nations, with consumers bearing the consequences.
Reduced Consumer Choices for Stablecoins in Europe
Binance announced that it would limit access to “unauthorized” stablecoins, though it remained unclear what constitutes an unauthorized stablecoin. The exchange later specified that it would restrict certain stablecoins for EU users only.
Kraken is also “actively evaluating” its stance on USDT. Additionally, OKX, the fourth largest crypto exchange globally, delisted USDT trading pairs in the European Economic Area.
Defending Stablecoins, Crypto’s Pioneering Killer Apps
Stablecoins have become a fundamental element of the digital asset landscape and are poised for continued growth. However, European regulators aim to fundamentally reshape stablecoins, potentially increasing consumer vulnerabilities.
In Switzerland, particularly, stablecoin issuers now face a tough choice: compromise user privacy or seek legal recourse through Swiss courts. Likely, they will opt for the latter if necessary.
Globally, consumers are paying steep prices to safeguard their funds from depreciation in local currencies by utilizing stablecoins. European regulators, especially those in Switzerland, should reconsider their stance on stablecoins to avoid harming consumers and risk losing competitive advantage in the global market.
