what does this mean for stablecoins?

On June 30, 2024, the “Markets in Crypto Assets” (MiCA) regulation will officially come into force on European territory and significant measures will be introduced to slow down the expansion of stablecoins managed from abroad in order to favor local ones related to the EURO.

The continent’s major exchanges such as Binance, OKX and Kraken have already prepared for the regulatory change and have reviewed some of the products offered to their customers in Europe.

However, all this could limit the Union’s technological expansion in the crypto sector, leading to a general regression rather than growth.

We delve deeper into the topic in this article.

MiCA and stablecoins: the crypto regulation that limits electronic money issuers will come into force from June 30th

On 10 October 2023 the regulation “Crypto Asset Markets” (MiCA) was approved by European Parliament with a favorable vote of 28 members, and now is about to come into force, officially marking the introduction of the first community regulation governing the crypto sector.

The topics in the new Text address a wide range of entities operating in the sector, such as crypto-asset issuers, crypto-asset service providers (CASPs), and crypto exchange platforms, addressing key issues such as protection of consumer, new obligations for anti-money launderingenvironmental impact and corporate social responsibility.

However, an entire section of the regulation is dedicated exclusively to the world of stablecoins, more precisely in relation to issuers electronic money token (EMT), that is, a specific type of crypto-asset that aims to maintain a stable value by referring to the value of an official currency.

This definition differs from that of Resource-referenced token (ART) which identifies crypto-assets aimed at maintaining a value relative to the combination of multiple assets or official currencies.

The MiCA establishes the tax relevance of exchanges (swaps) between cryptocurrencies and electronic money tokens, while exchanges from cryptocurrencies to asset-referenced tokens should not be considered in this sense.

Source: https://www.theblock.pro/

The new MiCa regulation also provides that the only stablecoins authorized to be freely traded in Europe are those that meet certain requirementssuch as their supervision by the European Banking Authority (EBA) and the presence of a specific “electronic money licence”.

These requirements severely limit some established stablecoins both in Europe and in other continents such as USDT, which becomes de facto illegal due to the lack of the specific license, which can be obtained in the case of depositing collateral assets with a credit institution based in the EU.

Furthermore, the new law which will soon come into force sets a maximum limit of 200 million euros in daily trading volume (quarterly average): This number is much lower than the volumes recorded daily by the main stablecoins in the cryptocurrency market.

According to some experts on the subject, such as Mathieu Hardy of the asset management app OSOM, this limitation of MiCa on the stablecoin front can be considered a strong discrimination against USD-pegged e-money tokens.

Looking at the average volume of the last 30 days of the main USD stablecoins, we can see how the top 10 diversified coins by blockchain belonging would well exceed the limit of 200 million euros per day.

Kaiko Research: A launchpad for EURO-pegged stablecoin cryptocurrencies

According to Kaiko Research, the upcoming MiCA regulation in Europe could re-evaluate the scope of EURO-pegged stablecoinsissued and managed by companies based in the Union.

The new regulation is in fact seen as a launching pad for local currency tokens, which currently still record particularly low volumes compared to those of other foreign electronic money tokens.

Already in recent months several credit institutions have moved to offer their own stablecoins, such as Société Générale with the launch of EURCV.

From October 2023 onwards, since the European Parliament approved the MiCA regulation, the weekly trading volumes of EURO-pegged stablecoins have recorded a sharp increase, even temporarily exceeding 100 million, suggesting that demand is finally increasing on European markets.

However, let us remember that the road to competing with products pegged to the US dollar is still very long.

To date, according to the data from The Block, 99.3% of Ethereum stablecoin market share is dominated by USD ones, while the respective EUR currencies garner just 0.63%.

The euro is still the “second best choice” compared to others FIAT currencies external to the dollar in this context, being the second most used currency in the stablecoin field.

Overall, the dollar-backed stablecoin continues to dominate the cryptocurrency bull and bear market.

Nearly 90% of all crypto transactions are executed using USD-backed stablecoins against the USD.

Their average weekly volume in 2024 was $270 billion, which is 70 times higher than their EU counterparts. In contrast, only 1.1% of all transactions are made using euro-backed stablecoins.

However, it is worth noting that this share has increased from almost zero in 2020 and is currently at an all-time high.

Although only time will tell whether the introduction of Mica will push euro-pegged stablecoins to compete with those from overseas, in the meantime Experts already agree that the regulation is having a positive impact on the cryptocurrency industry even before it actually comes into force.

For example, Dante Disparte, Head of Global Policy at Circle, noted in a post on VC investments in crypto projects on the continent increased almost 10-fold from 2022 to 2023, rising from the initial 5.9% to 47.6%.

Over the same period, the share of VC investments in the United States and Dubai decreased significantly.

Exchange, Tether and USDT: MiCA regulation as a step backwards for Europe

The main cryptocurrency exchanges operating in Europe have already prepared for the regulatory earthquake that will soon be unleashed with MiCaand they took steps to remove from their trading pairs those stablecoins deemed not to comply with the regulation.

Binance announced in this regard that it has differentiated its offer between stable currency”regulated” AND “not allowed“without however making explicit reference to which coins will be excluded for European customers.

What we know for now is that launchpads are present FDUSD will be suspended, and that the rewards in USDT for the “Spend-to-Earn” section will no longer be credited after June 29th, with the exception of the rewards accrued before this period: it is not clear, however, whether USDT, which appears to be the stablecoin most affected by the new regulation, it will still be able to be traded on Binance’s spot and futures markets.

The OKX exchange, however, delisted USDT already in Marchwithout referring to the MiCa regulation but with clear underlying links, while Kraken has recently denied intentions of similar delisting.

Meanwhile, from the latest news from the cryptocurrency market, the UpHold’s decision to delist 6 stablecoins including USDT, DAI, FRAX, GUSD, USDP and TUSD on July 1stexcluding USDC from the list, emerges.

MiCA’s rise against USD-pegged stablecoins, although motivated to leave room for EURO counterparts, could generate onboarding issues for European exchange customerswho still use USDT as their primary means of switching from FIAT to CRYPTO.

In fact, as highlighted by data from Kaiko Research, both on Binance and Kraken, the USDT-EUR pair appears to be a more traded instrument in terms of volumes than BTC-EURO, demonstrating that the Tether currency represents an essential resource for the European markets.

In such an environment, while OTC trading will continue to provide USDT-EUR liquidity, many traders may choose to turn to regulated alternatives such as USDC.

Source: https://research.kaiko.com/insights/what-mica-means-for-euro-stablecoins

Paolo Ardoino, Tether’s current CEO, did so heavily criticized the upcoming Mica regulation, underlining how the obligation for issuers to hold at least 60% of reserves in bank deposits constitutes a counter-efficient measure in terms of security for the end customer.

The European Central Bank, in fact, only insures bank deposits up to 100,000 euros, a figure significantly lower than the market capitalization of the USDT, which amounts to 112 billion dollars.

Requiring issuers like Tether to build their reserves with simple bank deposits to comply with regulations offers a possible premise for one of the largest financial disasters in the world of crypto finance in the event of a custodian bank collapse.

As a reminder, Tether currently holds reserves of cash and cash equivalents, US Treasuries, precious metals, Bitcoin and other investments, offering a perfectly differentiated asset allocation weighted by financial situation of the technology giant, which recorded profits of $4.5 billion in the first quarter of 2024.

USDT Reserves. Source: https://tether.to/en/transparency/?tab=reports

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