Tether CEO Paolo Ardoino has raised significant concerns regarding the European Union’s regulatory framework for stablecoins, suggesting that it could lead to a wave of bank failures. During a recent podcast interview, he criticized the EU’s deposit protection rules, which he believes could jeopardize the stability of stablecoin issuers like Tether.
Key Takeaways
- Paolo Ardoino warns of potential bank failures in Europe due to risky lending practices.
- EU regulations may force stablecoin issuers to keep large reserves in uninsured bank deposits.
- Ardoino compares the current banking situation to the collapse of Silicon Valley Bank in 2023.
- Tether plans to launch a U.S.-based stablecoin product amid these concerns.
Concerns Over EU Regulations
In an interview with the Less Noise More Signal podcast, Ardoino expressed his alarm over the EU’s approach to regulating stablecoins. He highlighted that the current framework could compel companies like Tether to maintain up to 60% of their reserves in uninsured bank deposits, which he views as a precarious situation.
Ardoino illustrated his point with a hypothetical scenario where Tether holds 6 billion euros of a 10 billion euro-pegged stablecoin in small banks with limited insurance coverage. He noted that the maximum bank insurance in Europe is only 100,000 euros, which he described as insufficient. "If you have 1 billion euros, that’s like spitting on a fire," he stated, emphasizing the risks involved.
The Risk of Fractional Reserve Banking
Ardoino elaborated on the mechanics of fractional reserve banking, explaining that European banks, like their counterparts worldwide, can lend out a significant portion of their deposits. In his example, if a bank holds 6 billion euros, it could potentially lend out 5.4 billion euros, leaving it vulnerable to liquidity crises.
He drew parallels to the collapse of Silicon Valley Bank in 2023, where a sudden surge in withdrawals revealed a mismatch between deposits and available liquidity. Ardoino warned that a similar situation could unfold in Europe, where a 20% redemption event could leave banks short billions of euros.
Implications for Stablecoin Issuers
The implications of these banking practices are dire for stablecoin issuers. Ardoino stated, "As a stablecoin issuer, you go bankrupt — not because of you, but because of the bank." He cautioned that if a bank fails, it could lead to the downfall of stablecoin companies, which would further fuel negative perceptions about the safety of stablecoins.
Ardoino criticized the EU’s regulatory approach, suggesting that it is designed to support banks at the expense of systemic stability. He noted that larger banks, such as UBS, are unlikely to engage with stablecoins, forcing issuers to rely on smaller, less stable banks, thereby increasing risk.
Tether’s Future Plans
Despite these challenges, Tether is moving forward with plans to launch a U.S.-based stablecoin product. The company is also diversifying its investments, recently increasing its stake in Latin American agricultural producer Adecoagro. This strategic shift indicates Tether’s commitment to expanding its footprint in the global financial landscape, even as it navigates regulatory hurdles in Europe.
As the landscape for stablecoins continues to evolve, Ardoino’s warnings serve as a critical reminder of the potential vulnerabilities within the banking system and the need for robust regulatory frameworks that protect both consumers and financial institutions.
