FILE PHOTO: FILE PHOTO: A representation of cryptocurrencies in this illustration taken, January 24, 2022. REUTERS/Dado Ruvic/Illustration/File Photo/File Photo/File Photo
FRANKFURT (Reuters) -The European Union's financial risk watchdog called on Thursday for urgent safeguards on stablecoins only partly issued in the bloc, echoing a warning from the European Central Bank, which is worried that their failure could induce a run on reserves.
Stablecoins are a type of cryptocurrency designed to hold a steady value by being pegged to a reserve asset such as a currency or basket of assets.
The EU has put in place one of the world's strictest regimes on crypto assets but policymakers worry that issuers originating from outside the bloc enjoy easier regulation and could import financial risk.
"The General Board stressed that third country multi-issuer schemes – with fungible stablecoins issued both in the EU and outside – have built-in vulnerabilities which require an urgent policy response," the European Systemic Risk Board, headed by ECB President Christine Lagarde, said in a statement.
EU rules require stablecoins to be fully backed by reserves. Lagarde said the bloc should hold companies that issue stablecoins both in the EU and abroad to the same standards.
In "multi-issuer" schemes, an EU and a non-EU entity jointly issue stablecoins, and the strict EU regulation does not extend to the non-EU issuer, tilting the playing field.
The main worry is that in the event of a run on the asset, investors will choose to redeem in the EU, since it has the strongest safeguards.
However, reserves held in the EU may not be sufficient to meet concentrated demand, creating a liquidity squeeze in the bloc and potentially forcing the ECB to respond.
"Multi-function groups may operate under regulatory regimes which are much more lenient than for financial conglomerates, raising the question of divergent prudential standards," the ESRB added.
(Reporting by Balazs Koranyi; Editing by Hugh Lawson)
