Regulation
Report Highlights Pros and Cons of MiCA Stablecoin Regulations – Ledger Insights
Today the Euro Digital Association published a relationship analyzing the European MiCA regulation and its impact on stable currency issuance. On the one hand, it suggests that it could be the basis for a global stablecoin regulation model. At the same time, it provides in-depth critique and suggestions for future improvements.
For example, he suggests that stablecoins might be worthy of a global body similar to the Basel Committee that oversees banks to have greater commonality in stablecoin standards. Insights from MiCA’s implementation could inform those standards.
The document highlights several areas where it would like to see improvements. Drawing on a paper Co-authored with Circle’s Patrick Hansen, he argues that the EU’s prominent stablecoin regime may be too strict.
Separately, MiCAR requires a very high percentage of reserves to be held by banks: 30% for regular stablecoins and 60% for significant ones. This impacts profitability and also exposes the stablecoin to credit risk. The collapse of Silicon Valley Bank caused a de-peg event for Circle’s USDC.
Another area concerns anti-money laundering. Since e-money tokens rely on another piece of legislation, there is a debate whether stablecoin issuers should only perform AML on issuance and redemption, or whether issuer AML also applies to secondary market trading.
Challenges for International Stablecoin Issuers
Additionally, international stablecoin issuers face some challenges in complying with MiCAR. It requires issuers to engage custodians authorized under EU regulations, while international stablecoins (asset referenced tokens) may already have foreign custodians. There is also the complexity of setting up a dual-issuer structure. For example, Circle’s French subsidiary will issue USDC in Europe.
We are trying to understand how these two versions of the same stablecoin are fungible given their different backing and potential for self-custody wallets of unknown jurisdiction. But that is another question.
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There was one area on the international side that we disagreed with. MiCAR imposes limits on the scale of foreign exchange e-money tokens (such as Tether, USDC) used in the EU. The paper argues that this could weaken the USD/EUR trading pair and that “the European economy will be cut off from global trade, including investment, trade in goods and services, and financial transactions, severely limiting global economic activity.”
We believe this is not the case following a deep dive We posted about this earlier this week. The limits cover (mostly) internal EU usage to pay for goods and services. Cryptocurrency trading, non-crypto investments, and finance do not count towards the limits. Transactions between an EU and a foreign (non-EU) country are also excluded. For example, if a German manufacturer sells to a French buyer in dollars, settling in dollar stablecoins, that counts. If a French buyer pays a US manufacturer in dollar stablecoins, that does not count towards the stablecoin limit.
Nonetheless, the paper highlights many of the grey areas and issues that need to be addressed both within the EU and beyond.