Tether CEO Warns 60% Reserve Rule May Cause European Bank Collapses

Paolo Ardoino, the chief executive of USDT issuer Tether, has expressed his concerns about the future of many European banks, predicting that a significant number will face severe challenges in the coming years. In a recent interview, Ardoino criticized the European Union's stablecoin regulations, asserting that they increase systemic risk to the economy rather than mitigating it.

Ardoino highlighted a specific regulation that requires stablecoin issuers to keep 60% of their reserves in uninsured cash deposits in Europe. He illustrated the potential risks with a hypothetical scenario: if a stablecoin has a market cap of €10 billion in Europe, €6 billion would need to be kept in uninsured cash deposits. Given that European banks operate on a fractional reserve system, they can lend out 90% of these deposits, leaving only €600 million in reserve. If there is a redemption request of 20%, or €2 billion, the bank would only have €600 million available, leading to a potential bankruptcy for both the bank and the stablecoin issuer.

Ardoino argued that these regulations are designed to bring liquidity to the banks, but they force stablecoin issuers to rely on smaller, riskier banks since larger financial institutions are unwilling to bank stablecoins. He warned that this setup could lead to a banking crisis in Europe, drawing parallels to the recent issues faced by Silicon Valley Bank. According to Ardoino, many European banks will "blow up" in the next few years due to these systemic risks.

Ardoino's warning comes at a time when the European banking sector is already dealing with economic stagnation, high levels of debt, and a slow recovery from the COVID-19 pandemic. The rise of digital currencies and blockchain technology adds another layer of complexity, as these innovations pose a significant threat to traditional banking models. Ardoino believes that banks must embrace these technologies and integrate them into their operations to remain competitive and relevant.

Ardoino's comments serve as a call to action for the European banking sector, urging institutions to adapt and innovate in the face of rapid technological change and regulatory pressures. His warning underscores the need for banks to rethink their business models and embrace new technologies to survive in the evolving financial landscape.