Regulation
Why EU stablecoin rules threaten to disrupt cryptocurrency markets – DL News
Op-ed
- MiCA risks fragmenting the $155 billion stablecoin sector, warn Hugo Coelho and Mike Ringer.
- The warning comes ahead of new rules that come into force at the end of June.
Hugo Coelho is the head of digital assets regulation at the Cambridge Center for Alternative Finance, while Mike Ringer is partner and co-head of the Crypto & Digital Assets Group at CMS. Opinions are theirs.
To warn about the impact of impending European regulation on stablecoins, Dante Disparte, head of strategy at stablecoin issuer Circle, sought to distinguish it from a turn-of-the-millennium concept that has passed into tech folklore.
“MiCA is not cryptocurrency’s Y2K moment that can be ignored,” Disparte he wrote on June 3 on the social network X. “Truly consequential developments [are] underway for digital assets in the world’s third largest economy”.
Also known as the “millennium bug,” Y2K refers to the glitch associated with the year 2000 change that threatened to wreak havoc on computer networks globally.
The year 2000 was not a hoax and a lot of work was done to avoid its negative consequences. But “the insect doesn’t bite”, as the Washington Post put it on the next day, and today it is remembered more than anything for the apocalyptic atmosphere and hysteria that surrounds it.
Disparte’s contrast between this and what is happening and what could happen to cryptocurrency markets when rules for electronic money tokens (the legal name of the single fiat currency that refers to stablecoins in regulating cryptocurrency markets) come into force EU cryptocurrencies) on June 30, is suitable.
EMTs perform critical functions in the cryptocurrency markets.
They facilitate cryptocurrency trading by being on the side of most trading pairs, protect investors from volatility, and provide collateral that powers decentralized applications.
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Any regulation that affects their design or limits their issuance, supply or trade in a market as large as the EU will undoubtedly have an impact.
So far, cryptocurrency markets have remained unfazed by MiCA.
According to the Cambridge Digital Money Dashboard, aggregate stablecoin supply exceeds $155 billion, up from $127 billion in January.
The share of supply per issuer remains largely unchanged, with the two largest stablecoins, USDT and USDC, accounting for over 70% and 20% of the market, respectively.
Look beyond the statistics and you can see some movement.
Major cryptocurrency service providers have unveiled plans to make changes to their services involving stablecoins in the EU in preparation for the regulation.
OKX moved first, announcing that it would remove USDT from its trading pairs.
Kraken then said it was reviewing its position.
Most recently, Binance announced that it will limit the availability of unauthorized stablecoins to EU users for some services, although not initially in spot trading.
“So, what is there about MiCA that might require changing stablecoins, as we know them?”
The inconsistency in responses suggests that there is no shared understanding of the implications of the regulation.
Compared to the weeks and days leading up to the turn of the millennium, you might say there are far fewer obvious signs of panic, but almost as much uncertainty.
So, what is there in MiCA that might require the change of stablecoins, as we know them?
In our view, the main source of disruption is likely to be issuer location requirements.
For issuers seeking to comply with the rules, this will be a much more challenging requirement to comply with than prudential requirements, including the requirement to hold at least 30% or – in the case of significant EMTs – 60% of reserves in accounts banking. and divide them among several local banks.
And it will deal a more immediate blow than strict limits on the use of dollar-denominated stablecoins within the EU.
These were designed to force the market to move towards euro-denominated stablecoins, but there isn’t much evidence of this yet.
According to MiCA, no EMT can be offered to the public in the EU and no one can apply for its admission to trading, unless it is issued by an entity incorporated in the EU licensed as a credit or electronic money institution, despite that the authorization regime for cryptocurrency service providers will not come into force until December 30th.
Some of its reserves will also need to be localized, as described above.
It is unclear how foreign issuers of stablecoins such as the dollar-denominated ones that currently dominate the market can continue to serve EU customers with such a regime.
In theory, issuers could move to the EU and distribute EU-issued stablecoins to the rest of the world. But this is highly unlikely in practice.
MiCA’s stringent prudential requirements would place these issuers at a competitive disadvantage in many non-EU markets.
It is also difficult to understand why other jurisdictions do not take “tit for tat” action and require issuers to localize in the same way as the EU, thus fragmenting the market.
An alternative route would be to issue the stablecoin by two parallel entities, one in the EU, from which it would serve EU customers, the other from abroad, to serve customers in the rest of the world.
This option, often touted in crypto circles, is marred by legal and operational complexities that have yet to be convincingly resolved.
There are basically two challenges to face.
The first is to preserve fungibility between two currencies issued by two separate entities, subject to different regulatory requirements and insolvency regimes and backed by different asset pools.
The second is to ensure that EU customers only hold coins issued by the EU entity, including through secondary market trading.
Although this problem is more evident and imminent in the EU than elsewhere, it would be wrong to dismiss it as an EU quirk.
Jurisdictions such as Japan, Singapore, and the United Kingdom are also grappling with the question of how to regulate stablecoins on a global scale.
Regulators need assurances that investors under their watch receive sufficient protections and can redeem their stablecoins at par even in times of crisis, even when the issuer and reserves are kept overseas.
If the history of finance teaches anything, this will only be possible – if ever – when there is sufficient alignment of the rules to allow regulatory deference or equivalence and cooperation between supervisors in different jurisdictions.
Equivalence regimes are more urgent and necessary in the cryptocurrency sector than in other sectors due to the borderless or digital nature of many activities.
Paradoxically, they are also further apart due to the embryonic and fragmented regulatory landscape.
For some reason, MiCA is one of the pieces of EU financial services legislation that does not provide an equivalence regime.
The UK and Singapore also continue to push hard on equivalence agreements, and the effectiveness of Japan’s equivalence mechanism remains to be tested.
Being a pioneer in cryptocurrency regulation, the EU is exposing the conundrum behind the regulation of global stablecoins.
His blunt approach threatens to dislodge a $155 billion market.
We will soon know whether, for stablecoins in the EU, June 30, 2024 is the new January 1, 2000, or something significantly worse.