Why European Banks Will Blow Up in the Next Few Years

Four banks blew up in the US in the last two years. Many more banks will blow up in Europe in the next few years. That is the prediction made by Tether CEO Paolo Ardoino on the Less Noise More Signal podcast.

Tether CEO Paolo Ardoino. Source: ZeroHedge

“Stablecoins are a safer way to hold digital dollars, with better access and better user experience. One of the reasons we decided not to have USD stablecoins in Europe.” Stablecoins are the better banks of today, he adds.

“Regulators were pushing us to have 60% of our reserves in uninsured cash deposits in Europe. Imagine that you have 10 billion euros in market cap of your stablecoin in Europe. Then 60% needs to be kept in uninsured cash deposits in a bank. Uninsured cash deposit means that the bank insurance in Europe is only 100,000 euros. If you have 10 billion, 100,000 euros is like spitting on a fire.”

With 60% of a stablecoin’s reserves—equivalent to 6 billion euros in his example—held in uninsured deposits, banks’ fractional reserve practices amplify the risk. “They can lend out 90% of it to people that want to buy a house, that want to start a business, and all that,” he explained. “So 5.4 billion euros will be lent out by the bank and 600 million euros will be cut.” In the event of a 20% redemption demand, or 2 billion euros, Ardoino warned that banks would fall short of cash. “You go to the bank and you tell the bank, well, I want 2 billion euros. And the bank says, well, I only have 600 million euros.”

Stablecoin issuers could go bankrupt, not because they are inherently risky but because of the banks. The regulators will blame stablecoin issuers, but the real cause is systemic risks in the banks.

“I’m so annoyed with the regulations in Europe. It’s designed to help the banks in Europe, but is actually creating huge systemic risks. Bigger banks are refusing to work with stablecoin issuers, forcing them to deal with smaller, less stable institutions.”

Tether, with a market cap that blew through $150 billion in the last few weeks, now commands 66% of the stablecoin market. The US Treasury expects the market cap for stablecoins to exceed $2 trillion by 2028, making this perhaps the most extraordinary financial story of the decade (quite apart from bitcoin).

"We are just exporters of what we believe to be the best product the United States ever created — that is, the US dollar,” the Tether CEO said in an interview with CNBC.

As we have repeatedly reminded our readers, stablecoins (100% backed by cash or near cash) are far safer than cash in the banks (which are roughly 10% backed by liquid collateral). All that keeps them afloat is the complex and unwieldy reserve requirements imposed by central banks and the Basel accords, and risk committees that decide where to lend money that belongs to depositors.

Fractional reserve lending is a powder keg waiting to blow up.

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