MiCA’s Stablecoin Regime and Its Remaining Challenges: Part 1

Transaction volumes show that stablecoins are currently the most important use case for cryptocurrencies. This makes June 30, 2024 an important milestone for cryptocurrency regulation in Europe, and potentially beyond, as the so-called “stablecoin regime” of the Markets in Crypto-Assets Regulation (MiCA) comes into force. This regulation requires issuers (and other persons) to have a MiCA license to publicly offer or trade asset-referenced tokens (ART) or electronic money tokens (EMT) within the European Union, without a transition period.

MiCA represents a significant shift towards a comprehensive regulatory framework that includes prudential and conduct requirements for both cryptocurrency issuers and cryptocurrency service providers (CASPs) within the EU. Previously, frameworks focused exclusively on combating money laundering and terrorist financing (AML/CFT). MiCA aims to unify the current fragmented regulatory landscape by establishing harmonised rules, providing legal certainty, protecting consumers and investors, and supporting the integrity and stability of the European financial system, while fostering innovation.

While the stablecoin regime will come into force later this month, the full regulatory framework for CASPs will become applicable six months later, on 30 December 2024. The European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) have launched extensive consultations on Regulatory Technical Standards (RTS), Implementing Technical Standards (ITS) and guidelines to help companies better understand the regulatory expectations for complying with the MiCA framework.

In this blog we delve specifically into MiCA’s stablecoin regime, including:

• On-chain data on stablecoin usage and an overview of MiCA’s stablecoin regime (Part 1)
• The main differences between ART and EMT and what is required by issuers (Part 2)
• The remaining practical challenges and legal uncertainty of this regulatory framework (Part 3)

Part 1: What On-Chain Data Tells Us About Stablecoins

While Bitcoin represents about 50% of the total cryptocurrency market capitalization approximately $2.2 trillionrepresents only a smaller portion of the overall transfer volume, about 10%. In 2023, the overall on-chain transaction volume reached $10 trillion, with stablecoins accounting for 60% of that volume (see Figure 1). This translates to a global daily average of $17.4 billion transferred via stablecoins.

Figure 1: USD value transferred on-chain per month

Chainalysis data also indicates that 1.5 million transfers are sent with stablecoins every day, with 91% of these transactions being under $10,000. Thus, the majority of transaction volume is in lower denominations, suggesting substantial retail usage of stablecoins.

Additionally, stablecoins are now being held for increasingly longer periods at a receiving wallet address before being transferred to another wallet address, around 40 weeks on average (see Figure 2). This is part of a more structural trend, as more people holding crypto assets are doing so for longer periods, expecting positive price movements. This trend is also typically more pronounced in bear markets, which see less trading activity. However, you can also see the cyclical impact of the current bull market on the right side of the chart, with average holding times already slightly shortening.

Figure 2: Average number of weeks the goods were held, i.e. not moved from the receiving address

In our recent Policy Pulse Webinar we also discuss these trends with Dimitrios Psarakis AND Philip Gradwell.

MiCA’s Stablecoin Scheme

MiCA defines cryptocurrencies and distinguishes three types:

1. asset-referenced tokens (ART),
2. Electronic Money Token (EMT) and
3. other tokens that are neither ART nor EMT.

The main difference between ART and EMT is the basic peg:

• The arts under Title III are a type of cryptocurrency that is not an electronic money token and that claims to maintain a stable value by referencing another security (e.g. gold and cryptocurrencies) or right or a combination thereof, including one or more official currencies (e.g. a basket of currencies).
• EMT under Title IV are a type of cryptocurrency that claims to maintain a stable value by referencing the value of an official currency.

The rules that apply to EMTs and ARTs (referred to in this blog as “stablecoins,” unless otherwise stated) will come into effect on June 30, 2024.

The third category of tokens according to MiCA are “other tokens,” such as Bitcoin or Ether. Regulatory requirements for these “other tokens” will come into effect on December 30, 2024, along with the regulatory framework for CASPs offering one or more of the ten specific MiCA services.

As for so-called “algorithmic stablecoins”, which aim to maintain a stable value by executing an algorithmically driven supply and demand system, these could fall under the definition of ART or EMT and therefore MiCA specifies that issuers of such tokens are required to follow the respective rules. If they do not fall under these definitions, issuers must still follow the rules for “other tokens”.

Finally, it is worth noting that MiCA excludes from its scope tokens that are already subject to other regulatory frameworks, such as those representing financial instruments (e.g. shares, bonds and derivatives) regulated by the EU Markets in Financial Instruments Directive (MiFID).

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