Crypto firms are increasingly arguing for the right to bypass banks

Crypto firms are increasingly arguing for the right to bypass banks

The European Central Bank should be accessible to other payment companies than traditional banks to allow users to redeem stablecoins for cash directly.


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In March, four US banks and one Swiss bank collapsed in 11 days. First Republic Bank collapsed in May. In those two months, three of the four biggest bank failures in U.S. history occurred. The two months were a painful reminder of the risks banks face, which can spread quickly to other industries.

Ironically, while the focus was on the potential risks that the crypto-assets sector might pose to traditional finance, it was instead bank failures that became a major stability threat to the crypto asset industry.

Financial regulation should first aim to reduce financial stability risks and, if possible, limit contagion risk to prevent further damages, regardless of the direction in which the contagion is moving.

Stablecoin issuers must rely on banks to mint and redeem fiat currency. According to the assessment by the European Commission of the Payment Service Directive, the indirect access to settlement through fiat money exposes future issuers in the European Union of regulated stablecoins (also known as emoney tokens) to an disproportionate counterparty risk and cost. It ultimately constrains innovation in the payments industry.

Related: CBDCs could lead to a dark future for the world

Giving regulated fiat stabilitycoins access to central bank account would not only be an important step for the security of fiat currencies online, but for payments innovation in general.

Stablecoins would be a way for issuers of stablecoins to separate the high-velocity payment activity from the illiquidity in bank loan portfolios.

The MiCA (Markets in Cryptoassets) regulation in the EU offers a great opportunity for the continent. The regulation, which was agreed upon at the end June 2022 before the inherent risks of banking became evident in early 2023 mandates that EMT issuers keep at least 30% their reserves at credit institutions. Was meant to be a measure that would improve the liquidity of EMT issuers and their risk exposure, but will end up burdening EMT activity with counterparty and banking risk. In an age where information is centered around social media and mobile banking, the recent banking crisis taught us to change our assumptions regarding liquid liabilities backed up by illiquid assets.

This problem has been solved before. EMT issuers and all other e-money providers should be able to directly access central bank accounts. EMT issuers can protect EU customers by transferring fiat money directly to the central banks.

Since 2017, e-money providers in the United Kingdom have had direct access to Bank of England settlement layer. , according to the Bank of England, this would “help increase the competition and innovation” in the payments market and create “more varied payment arrangements with fewer points of failure.” Mark Carney , former Governor of the Bank of England, described as a legislative change that could “deliver a great disbursement of banking to its core functions of settling payment, performing maturity transformations, sharing risk, and allocating capital.”

Lithuania is one of the few EU member states that has made it a standard practice to store e-money at its central bank. The Central Bank of Lithuania permits e-money and payment institutions to access the clearing system and open settlement accounts directly. By the end of 2022 out of 84 regulated Lithuanian e-money establishments, 63% had funds in the central bank. Over two-thirds of the emoney reserves held in Lithuania are with the Central Bank of Lithuania.

Related: CBDCs are a threat to our future. It’s time for us to stand up.

All e-money institutions in the EU should be able to use this facility.

There has never been a better time to pass legislation. It is necessary to conduct a focused review of Settlement Finality Directive as part of a review of PSD or Instant Payments Regulation.

The IPR negotiations have already established a political consensus on the need for such a review, since a resolution of direct access to settlement will also support and speed up the rollout in the EU of instant payments.

Impact Assessment for the Payments Service Directive is very clear about the need for equal playing fields between banks and nonbanks on the payment market. The vulnerabilities in banking by 2023 adds another argument to the already well-understood EU discussion.

It is clear that the benefits of allowing non-bank institutions to access central bank accounts are not only for safety and liquidity, but also for greater innovation within a system where global systemically significant banks are becoming more dominant. It has never been more important to grant e-money companies access to central bank account. The EU should take advantage of this opportunity to improve its financial system’s competitiveness and resilience.

Patrick Hansen works as the director of EU policy and strategy at Circle. He previously served as the head of strategy and development for Unstoppable Finance’s crypto-wallet and was also responsible for blockchain policy at Bitkom – Europe’s largest technology trade association. He has master’s degrees both in political science and business.

This article is intended for general information and is not meant to be construed as investment or legal advice. The author’s views, opinions and thoughts are his or her own and do not necessarily represent those of Cointelegraph.