To access central bank accounts in the European Union (EU) today, electronic money token (EMT) issuers, and by extension all electronic money institutions (EMIs), have no choice but to rely on banking partners.
That lack of direct access to fiat settlement affects stablecoin issuers like Circle — the regulated FinTech behind the USD coin (USDC), one of the world’s largest stablecoins — exposing them to disproportionate cost and counterparty risk, and ultimately stifling innovation and competition in the EU payments space, says Teana Baker-Taylor, Circle’s vice president of policy and regulatory strategy in EMEA.
It’s a challenge that doesn’t exist in the U.K., however. In fact, since 2017, EMIs in the country have had direct access to the Bank of England (BoE) settlement layer as part of government efforts to increase innovation and competition in the U.K. payments sector.
“The Bank of England and the FCA [Financial Conduct Authority] have been very committed, as has the government, to being future-focused in their FinTech agenda,” Baker-Taylor told PYMNTS in an interview, adding that the EU could take a cue from the U.K. government’s move “to create a more diverse payment infrastructure and payment arrangements with fewer single points of failure.”
Putting in place legislation that grants EMIs’ direct access to central bank accounts is also an opportunity to ensure the unbundling of banking’s two core business functions: settling payments and creating credit. And according to Baker-Taylor, that separation is even more critical today given the impact recent bank failures have had on the digital asset sector.
“High-velocity payments should be able to potentially exist outside of those financial stability risks in the first place, and then limit contagion to risks that might happen within the banking system,” she said.
Last month, the EU passed its landmark Markets in Crypto Assets (MiCA) regulation, becoming one of the first jurisdictions in the world to introduce a comprehensive set of rules surrounding crypto assets and their use.
According to lawmakers, the legislation, which is more than four years in the making and is aimed at harmonizing the EU digital asset market, will guarantee equal rights for crypto asset issuers and ensure high standards for consumers and investors.
But some of the provisions agreed on in 2022, such as the mandate for EMT issuers to hold at least 30% of their reserves as deposits in credit institutions, are no longer reasonable in light of the current turmoil in the banking sector, and may lead to the inverse of intended outcomes, Baker-Taylor said.
“That [30% requirement] was originally designed to increase liquidity but what it has done now is to potentially create more risk exposure for EMT issuers, who are ultimately burdened with banking and counterparty risk today,” Baker-Taylor noted.
However, change could be on the horizon, as the EU Commission is reviewing an extension of fiat settlement permissions to EMIs as part of the third Payment Service Directive (PSD3). But that could take several years, Baker-Taylor argued, pinning her hopes instead on the ongoing instant payment regulation review to accelerate the extension of direct central bank access to EMIs in the EU.
When it comes to cross-border remittances, Baker-Taylor said stablecoins are already changing the game by enabling individuals to transfer funds in a way that is cheaper, faster, and much more transparent.
She pointed to a partnership between Circle, the United Nations and the United Nations High Commissioner for Refugees (UNHCR) to disburse humanitarian aid to Ukrainian refugees using USDC as an example, enabling displaced individuals to receive payments “directly to their wallet within a matter of seconds at a fraction of the cost.”
And although CBDCs will be able to do the same, as in facilitating cheaper and faster settlements, Baker-Taylor argued that the digital central bank money will be limited because it “is still going to be the currency of one country that then gets sent to another country,” and as a result will always create a potential for foreign exchange (FX) risks and high transaction costs.
Moreover, the fact there is no CBDC in place today — both the digital pound and digital euro are several years away from launch — is all the more reason why she said it’s time to take stock of the innovation “we are letting sit on the table waiting for CBDCs” when stablecoins can help fill that gap.
“If we could have that today, and we do have it, then why wouldn’t we want to lean into ensuring that stablecoins can facilitate that function? Because I would argue that maybe we don’t have a need for retail CBDC, especially if stablecoin issuers were able to keep reserves and deposits at the central bank,” Baker-Taylor said.
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