Regulation
EU Cryptocurrency Regulation Ushers in Stablecoin Regime
Tough new rules for stablecoins came into force in the European Union this week, with the first parts of its cryptocurrency markets regulation being implemented.
While the clarity brought by the new regime has been widely welcomed, the rules impose significant restrictions on the use of dollar-denominated stablecoins, which account for the vast majority of global trading volumes.
It has not officially come into force yet. in May of last yearHowever, the provisions related to stablecoins came into force on June 30. Mica’s remaining obligations, which concern cryptocurrency service providers, will come into force at the end of this year.
The implementation of stablecoin regulations has prompted cryptocurrency firm Circle to register as an electronic money institution with the French banking regulator Autorité de Contrôle Prudentiel et de Résolution. The EMI license marks Circle as a Mica-compliant stablecoin issuer, allowing it to pass its license within the EU. Circle claims to be the first issuer to comply with 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 as they ban all decentralized stablecoins and yield-based stablecoins. They also limit the use of stablecoins in real-world payments, capping them at 1 million transactions and €200 million per day.”
By being strict with USD-backed stablecoins, Mica runs the risk of deeming many existing coins as non-compliant. Crypto-focused media outlets like Cointelegraph have reported that crypto exchanges Uphold, Bitstamp, Binance, Kraken, and OKX have started delisting stablecoins like Tether or have begun restricting services for EU-based users. Tether’s dollar-backed coin, dubbed USDT, is the world’s largest by market cap. Tether would need to register in the EU to continue its operations.
“There may be some growth as institutions are able to trade cryptocurrencies against Mica-compliant euro stablecoins. However, the stablecoin market is heavily dominated by dollar stablecoins and this is unlikely to change,” Tischhauser says.
“Since Tether is not deemed compliant under Mica, but [Circle’s] USD Coin is likely to see a market share shift in favor of USD Coin, although cryptocurrency trading is dominated by the US and Asia, so Europe may only have a minor 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, Chairman and Co-Founder, Stablecoin Standard
Christian Walker, chairman 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 with transaction limits in particular, given the dominance of the USD in cryptocurrency and its role as a relative on-chain safe haven for crypto users. Additionally, operational compliance requirements could be challenging for those issuing from jurisdictions where there is currently no such regulation,” he says.
Despite these caveats, Walker adds: “Regulation of stablecoins is necessary for the maturation of the industry and Mica sets a high bar that will likely become the international benchmark as other jurisdictions reconsider their positions.”
This opinion is shared by many others who see the provision of stablecoins 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 increased regulatory oversight it introduces and the requirement for cryptocurrency issuers and service providers to obtain authorisation from relevant national authorities.”
“By initially focusing on asset reference tokens and e-money tokens, Mica is laying the foundation for a more structured and secure financial sector,” he adds.
Marion Laboure, macro strategist at Deutsche Bank Research, also sees the bright side of the stablecoin regime.
“I see regulation as a positive for the industry, as a clearer regulatory framework will drive corporate adoption, greater liquidity, and less concentration; and ultimately help address some of the volatility,” he says.
Intervention in The Banker last yearStefan Berger, a member of the European Parliament who acted as rapporteur for Mica, said the regulation “creates legal certainty for innovation in the distributed ledger sector.” It is designed to protect investors and ensure that investment platforms are not subject to manipulation.
As part of the regulation, the EU has introduced various classifications of coins, including e-money tokens, asset-referenced tokens, utility tokens, and non-fungible tokens. Berger emphasized that these classifications reflect “the diversity of the cryptocurrency landscape, recognizing the various functions that these assets serve.”
Issuers of stablecoins as e-money tokens and asset-related tokens are subject to stringent requirements under Mica to qualify as e-money institutions or apply for authorisation under Article 19, respectively. From 30 June 2024, they must, among other things, be authorised as e-money institutions or credit institutions; provide a white paper detailing the key aspects of the token that need to be approved by the national competent authority of the home Member State; and undergo rigorous suitability assessments for members of the management body and significant shareholders of the issuers, ensuring that key individuals are suitable to operate within the regulatory framework.
Also effective this week, cryptocurrency service providers offering custody, trading, exchange, order execution and advisory services are now subject to a number of obligations. These include notifying the NCA of their home member state at least 40 working days before commencing any cryptocurrency services, obtaining authorisation from the relevant NCAs to demonstrate compliance, ensuring measures are in place to protect consumers and implementing robust systems to prevent market abuse, ensuring fair and transparent operations.