EU prepares for leap of faith into cryptocurrencies

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Hello and welcome to the FT Cryptofinance newsletter. This week we will look at the new EU crypto rules.

The EU’s landmark cryptocurrency regulation will begin to take effect over the weekend, but its distorting effect is already being felt on the market.

It is worth highlighting the arrival of MiCAR, the regulation of cryptocurrency markets. For better or worse, it is the first stab into a comprehensive framework for trading and holding cryptocurrencies or providing related services.

The first two of the seven parts, concerning stablecoins, will come into force on June 30, with the remainder by the end of the year.

The regulation is intended to “unleash the full potential of cryptocurrency” to help businesses and consumers, while applying the same kind of legal protections consumers receive in stocks and bonds. Its unspoken purpose was to hammer projects like Meta’s ill-fated Libra stablecoin into a rigid regulatory box.

But on the eve of its grand entrance, MiCAR already appears dated and, according to critics, risks hindering innovation and preventing EU citizens and companies from using products available elsewhere in the world.

As with all regulations, MiCAR struggles to keep up with market developments. It does not cover staking, while service providers offering a “fully decentralized” service, without any intermediaries, are outside the scope of the rules.

But it already appears to be having an impact. Last month, US group Paxos announced the creation of Lift, a stablecoin pegged to the US dollar that will offer holders a yield and will be regulated by Abu Dhabi. The EU was a no-go, according to CEO Charles Cascarilla, because regulations were “stifling.”

MiCAR prevents stablecoins from paying any interest, including staking rewards. Stablecoin operators like Paxos are also required to hold at least 30% of their reserves in EU-recognized banks, which could be as high as 60% depending on the size of the coin.

Nowadays it’s not so easy to find banks willing to accept cryptocurrency-related business, which creates a problem that is largely out of the control of the companies that need to comply.

MiCAR also limits stablecoin operators to a threshold of 1 million transactions or just €200 million per day. Already more than 95% of total stablecoin activity occurs in US dollar-denominated coins, such as Tether, USDC and Dai, and at the time of writing, more than $50 billion has been traded in the last 24 hours.

“MiCAR does not reflect the reality on the ground,” said an executive at a stablecoin operator.

It’s also leading to some impressive legal gymnastics. This week Swarm Markets, a Berlin-based crypto group, said it would start trading gold, but with a twist.

MiCAR makes it difficult to launch asset-backed tokens, based on gold and other commodities, which are fungible, so the metal is represented on a blockchain as an NFT. Just like regular gold trading, the metal itself will remain in a vault in London.

“MiCAR does not apply to cryptoassets that are unique and non-fungible with other cryptoassets,” said Timo Lehes, CEO of Swarm.

It also potentially limits other innovations. One emerging trend this year is tokens that act like stablecoins but offer a type of interest to holders for lending them out. They include tokenized Treasury funds, managed by firms such as BlackRock and Franklin Templeton, with transactions recorded on blockchains such as Ethereum. Some professional cryptocurrency traders and brokers are exploring their use as collateral in token trading.

MiCAR is an addition to existing rules on EU markets. It is designed to capture financial activities that cannot be covered by major post-2008 EU legislation such as Mifid II.

Tokens that offer a return similar to that of a security, such as a staking reward, would fall under Mifid II rather than MiCAR, regulatory experts say, and that requires most securities to be recorded in book-entry form in a central securities depository.

This definition could be problematic, as Ethereum may not qualify as a book-entry CSD. If a digital CSD is not available, the tokenized security must be converted back into a stock, making the process of putting the product on a blockchain moot.

However, it is not impossible. On Thursday, KfW issued a three-year digital benchmark bond with a coupon of 2.75 percent via Deutsche Borse’s digital platform D7, with the exchange operator’s Clearstream depository serving as the central registry tracking ownership.

But this centralized, tightly controlled digital ledger is a far cry from the promised land of decentralized blockchains, widely traded tokens, and the freer movement of money.

MiCAR has other problems. Among these, as with other EU regulations, are enforcement issues with the EU’s financial services passport system, which allows companies to sell services approved by a regulator in all 27 countries. Historically, some companies have sought the regulator most favorable to their business.

It is sometimes said of European regulation that even the poorly studied parts are never repealed, but only improved. In the coming months, the new European Commission will set out its agenda for the next five years. Expect “further improvements to the digital finance strategy” to be part of it.

What’s your opinion? Write me at philip.stafford@ft.com

Highlights of the week

• Solana’s price rose more than 8% on Thursday, according to fund manager VanEck has applied with U.S. regulators for an ETF based on the token. He said Solana is a commodity like bitcoin and ether.

• On Monday, Kanav Kariya, who led proprietary trader Jump’s move into cryptocurrency, said he was leaving the Chicago-based group. a post On social media site X, he said he resigned as president of Jump Crypto “with a heavy heart and great excitement.”

Data mining: living for the weekend

Cryptocurrencies can be traded 24/7, but it seems like people still like weekends off. The share of average weekly volumes traded on Saturdays and Sundays is continually decreasing, and according to data from Kaiko Research, the advent of spot ETFs has only accelerated the trend.

And finally . . .

The 111th Tour de France begins this weekend, starting in the Italian city of Florence. To get in the mood, here’s Claudio Chiappucci’s classic 1992 tour through the crowds in the mountains to Sestriere. If cycling is not your thing, there is always a truly engaging tour around the largest art collection in the world, the Uffizi.

Cryptofinance is edited by Laurence Fletcher. To view previous editions of the newsletter click Here.

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