Elena Carletti, who chairs the risk committee on UniCredit Bank’s board, has warned that a potential financial shock linked to crypto companies in Europe could prove harder to manage than the US banking crisis of 2023, due to key differences in deposit protection mechanisms. Carletti noted that European regulators would not be able to quickly implement a system equivalent to the full deposit coverage enacted in the US after the collapses of Silicon Valley Bank (SVB) and Signature Bank.
Emergency measures in the US
In March 2023, after SVB and Signature Bank failed, US authorities moved swiftly to guarantee not only standard depositors but also all balances, including those held by stablecoin issuers. This step was crucial for crypto firms with large assets, especially stablecoin companies. At the time, it was revealed that Circle’s stablecoin USDC had $3.3 billion in reserves in SVB. The turmoil caused USDC to temporarily lose its 1:1 peg to the US dollar.
Europe’s limited guarantee system
The European Union’s Markets in Crypto-Assets (MiCA) regulation mandates that stablecoin issuers keep a significant share of their reserves in liquid assets such as bank deposits or government bonds. This brings crypto markets and the banking sector into closer contact. However, Carletti emphasized that the EU deposit guarantee system generally covers up to only 100,000 euros per person per bank. She stressed that, in a major crisis, it would not be feasible for such a system to cover the full reserves backing stablecoins.
Carletti explained that while the US measures provided substantial stability in crypto markets, Europe does not have the capacity to offer the same level of protection, creating dual vulnerabilities.
Glossary: MiCA (Markets in Crypto-Assets) is a comprehensive regulatory framework drafted by the European Union to oversee crypto markets. It aims to regulate reserve management and investor protection by stablecoin issuers.
A shifting balance between banks and crypto firms
As the financial ties between crypto firms and banks grow stronger, concerns are rising over the limited insurance coverage for large volumes of stablecoin reserves. Carletti pointed out that this setup forges a closer link between stablecoin issuers and the banking sector but leaves depositors vulnerable in the event of a major crisis.
| Country/Region | Deposit Insurance | Stablecoin Reserve Coverage |
|---|---|---|
| US | Unlimited (all balances in a crisis) | Included in SVB and Signature cases |
| EU | 100,000 euros per person per bank | Falls under MiCA, no extra protection |
System vulnerabilities and potential risks
Carletti argued that only partial state guarantees on stablecoin reserves create simultaneous fragility in both the traditional banking system and the crypto sector. As the link between banking and crypto in the EU grows, experts warn that, during a severe market shock, not all funds could be safeguarded as they were in the US. As a result, European regulators are expected to develop new protections in response to changing market conditions.
