The European Central Bank and other EU central banks are calling for changes to the bloc's stablecoin reserve rules, warning that current requirements could expose banks to liquidity risks during large-scale redemptions. If adopted, the shift would reshape how the reserves backing EU stablecoins are held.

Under the EU's Markets in Crypto-Assets (MiCA) regulation, stablecoin issuers must hold at least 30% of their reserves as bank deposits, a requirement that rises to 60% for tokens classified significant under thresholds tied to user numbers, issuance size and transaction volumes. Tokens with the significant designation face enhanced supervision by the European Banking Authority. The European System of Central Banks (ESCB) wants those deposit requirements removed and replaced with minimum liquidity thresholds based on how quickly reserve assets can be converted into cash.

The ESCB set out its proposals in its response to the EU's targeted consultation on MiCA, calling for liquidity requirements tied to assets maturing within one and five working days and identifying overnight reverse repurchase agreements and short-term government bonds as potential reserve instruments. Both are short-dated instruments that can typically be converted into cash within days, the same horizon the proposed thresholds are built around.

According to the central banks, the current rules create a direct link between stablecoin issuers and commercial banks. A sudden wave of redemptions could force issuers to withdraw large deposits rapidly, potentially placing pressure on banks that rely on those funds. In effect, stress in crypto markets could arrive at banks as a wave of deposit withdrawals.

The ESCB also pointed to the March 2023 collapse of Silicon Valley Bank as an illustration of the risk. The US lender's failure, one of the largest in US history, triggered stress for Circle's USDC stablecoin after the company disclosed that $3.3 billion of its reserves were held at the bank. USDC briefly lost its dollar peg, falling below $0.90, before recovering after US regulators guaranteed all Silicon Valley Bank deposits. For the central banks, the episode showed how reserves held as deposits can become difficult to access precisely when issuers need them, transmitting stress from the banking system into crypto markets.

The proposal comes as European policymakers review MiCA and its implementation, highlighting a growing regulatory focus on how stablecoins could transmit liquidity shocks between crypto markets and the banking system. The ESCB's response now forms part of the input to that review, where one open question is whether the 30% and 60% deposit requirements give way to the proposed liquidity thresholds. MiCA, the EU's comprehensive crypto-asset framework, entered into force in 2023, with its stablecoin provisions applying to issuers across the bloc since June 2024.