EU banking regulator suggests the following to reduce risk in crypto sector

• The European Banking Authority Chair emphasized the diversification of stablecoin reserves for robust risk management.
• He also stated that while the EU’s MiCA regulations would take effect in 2024, crypto exchanges should begin adapting to these developments right away.

The European Banking Authority (EBA) Chair, José Manuel Campa, has stated that the impending European Union laws governing stablecoins will focus on ensuring issuers maintain diverse reserves, handle conflicts of interest, and do not entangle other exchanges when gone berserk.

Campa made these recommendations in an article he wrote for the Eurofi magazine.

He wrote that while the EU’s Markets in Crypto Assets Rules (MiCA) are slated to take effect in 2024, crypto exchanges should begin adapting to these developments right away.

MiCA requires stablecoin issuers to have sufficient reserves to manage volatility, and the EBA will ensure that these entities maintain reserves that take into account the deposit component’s diversification.

EBA will play a major role in MiCA’s implementation by drafting subsidiary legislation.

While the law has not yet been legally enacted, the parameters of MiCA are now well-known and crypto exchanges should update their functions to adapt to the new developments to guarantee appropriate risk management, suggested Campa.

Campa emphasized the necessity of stablecoin issuers avoiding conflicts of interest and mapping relationships to custodians and trading exchanges to prevent risks from entrenching the entire crypto ecosystem.

Multiple crypto failures make regulators cautious

The drastic collapse of algorithmic stablecoin TerraUSD in May 2022 drew the attention of regulators. The authorities are now working on how to control cryptocurrencies that are linked to the value of fiat money or other assets such as gold.

The collapse of FTX in November 2022 and the ensuing global crypto crisis also made regulators aware of the dangers posed by such large crypto corporations.

Campa stressed that risk management is not a one-way street and regulatory bodies should implement their policies at a multilateral level.

As a result, in addition to regulating and overseeing the crypto asset industry, the EBA must strengthen the framework for regulating other sections of the financial system, the banking sector in particular.