Concerns Over European Banking Stability
Paolo Ardoino, the CEO of Tether, the issuer of USDT, believes that a significant number of European banks could face serious challenges and potentially collapse in the coming years. In a recent interview with Pascal Hügli, Ardoino criticized the stablecoin regulations set forth by the European Union. He argues that these regulations increase systemic risks to the economy rather than mitigate them.
“Consider this simple scenario: If your stablecoin has a market capitalization of €10 billion in Europe, the regulations require you to keep 60% of your reserves in uninsured cash deposits at banks. This means that out of that €10 billion, €6 billion must be held in cash. However, in Europe, bank insurance only covers deposits up to €100,000 per depositor.”
Implications of Cash Reserves
With €6 billion tied up in a bank, it is crucial to note that all European banks operate on a fractional reserve system, allowing them to lend out about 90% of their deposits. Consequently, out of your €6 billion, only around €600 million would remain available as liquid assets.
“Now, imagine a scenario where you receive a redemption request for 20%, meaning you need to pay out €2 billion. You approach the bank, only to discover they can provide only €600 million in cash. As a stablecoin issuer, this situation could lead to your bankruptcy — not due to your failure, but because of the bank’s inability to fulfill withdrawal requests. Consequently, if the bank collapses, you too could face insolvency.”
Dependency on Smaller Banks
Ardoino further argues that despite these regulations being intended to bolster liquidity for banks, major European financial institutions are unlikely to provide services for stablecoins. This situation leaves compliant stablecoin issuers dependent on smaller banks, which inherently carry greater risks.
A Warning for the Future
According to Ardoino, this precarious setup is likely to trigger a banking crisis in Europe.
“Mark my words, similar to what happened with Silicon Valley Bank, which nearly faced collapse in 2023, European banks will encounter similar issues. Many banks in Europe could face substantial failures in the next few years,”
he warned.
