Strict new rules related to stablecoins came into effect in the EU this week with the implementation of the first portions of the bloc’s Markets in Crypto-Assets regulation.
While the clarity provided by the new regime has been broadly welcomed, the rules place significant restrictions on the use of stablecoins denominated in dollars, which account for the vast majority of global trading volumes.
Mica officially came into force in May of last year. However, provisions related to stablecoins came into effect on June 30. Mica’s remaining obligations — which concern crypto asset service providers — will come into effect at the end of this year.
The coming into effect of stablecoin regulations prompted cryptocurrency firm Circle to register as an electronic money institution with French banking regulator Autorité de Contrôle Prudentiel et de Résolution. The EMI licence marks Circle out as a compliant stablecoin issuer under Mica rules, enabling it to passport its licence within the EU. Circle claims to be the first issuer to be in compliance with the stablecoin regulations.
While acknowledging that “regulatory clarity reduces risk for market participants”, Katalin Tischhauser, head of investment research at Sygnum, argues that “the rules are overly restrictive in that they ban all decentralised stablecoins as well as yield-bearing stablecoins. They also limit the use of stablecoins in real-world payments, restricting them to 1mn transactions and €200mn a day”.
By being strict with stablecoins tied to the US dollar, Mica runs the risk of deeming many existing coins as non-compliant. Cryptocurrency-focused press outlets such as Cointelegraph have reported that crypto exchanges Uphold, Bitstamp, Binance, Kraken and OKX have started to delist stablecoins such as Tether or have begun restricting services for EU-based users. Tether’s dollar-pegged coin, dubbed USDT, is the world’s largest by market capitalisation. Tether would need to register in the EU to continue its operations.
“There may be some growth due to the fact that institutions will be able to trade crypto versus Mica-compliant euro stablecoins. However, the stablecoin market is heavily dominated by dollar stablecoins and this is unlikely to change,” says Tischhauser.
“As Tether is not deemed compliant under Mica, but [Circle’s] USD Coin is, there is likely to be a shift in market share in USD Coin’s favour — although crypto trading is dominated by the US and Asia, so Europe may have only a smaller impact.”
Stablecoin regulation is necessary for the maturation of the industry and Mica sets a high bar that will likely become the international benchmark
Christian Walker, chair and co-founder of Stablecoin Standard, a global industry body for stablecoin issuers, describes it as a “balancing act between consumer protection and innovation”.
“I think many of the larger USD-denominated stablecoin issuers will struggle particularly with the transaction limits, given the US dollar dominance in crypto, and its role as a relative safe haven on-chain for crypto users. Furthermore, operational compliance requirements may be complicated to navigate for those issuing out of jurisdictions where no such regulation currently exists,” he says.
Despite those warnings, Walker adds: “Stablecoin regulation is necessary for the maturation of the industry and Mica sets a high bar that will likely become the international benchmark while other jurisdictions review their own stance.”
That view is echoed by many others who view the stablecoin provision in a positive light.
The stablecoin application introduced this week will have “profound implications for financial institutions” across the EU, says Olivier Carré, deputy managing partner, technology and transformation leader at PwC Luxembourg, “particularly given the enhanced regulatory oversight it introduces and the requirement for crypto-asset issuers and service providers to obtain authorisation from national competent authorities”.
“By focusing initially on asset reference tokens and e-money tokens, Mica lays the groundwork for a more structured and secure financial sector,” he adds.
Marion Laboure, macro strategist at Deutsche Bank Research, also sees the positive side of the stablecoin regime.
“I perceive regulation as a net positive for the industry as a clearer regulatory framework will drive corporate adoption, higher liquidity – and less concentration; and ultimately partially help address volatility,” she says.
Speaking in The Banker last year, Stefan Berger, a member of the European parliament who served as rapporteur for Mica, said the regulation “creates legal certainty for innovation in the distributed ledger sector”. It is meant to protect investors and ensure investment platforms aren’t open to manipulation.
As part of the regulation, the EU introduced various coin classifications including e-money tokens, asset-referenced tokens, utility tokens and non-fungible tokens. Berger pointed to these classifications as reflecting “the diversity of the crypto landscape, recognising the various functions these assets serve”.
Issuers of stablecoins such as e-money tokens and asset-referenced tokens are subject to rigorous requirements under Mica for qualifying as electronic money institutions or applying for authorisation under Article 19, respectively. As of June 30 2024 they must, among others, be authorised as electronic money institutions or credit institutions; provide a white paper detailing the key aspects of the token that must be approved by the home member state national competent authority; and submit to rigorous suitability assessments for members of the management body and significant shareholders of issuers, ensuring that key individuals are fit to operate within the regulatory framework.
Also in effect this week, crypto asset service providers offering custody, trading, exchange, execution of orders, and advisory services, are now subject to a range of obligations. Those include notifying the NCA of their home member state at least 40 working days before commencing any crypto asset service, obtaining authorisation from relevant NCAs to demonstrate compliance, ensuring measures to protect consumers, and implementing robust systems to prevent market abuse, ensuring fair and transparent operations.
