EU Cryptocurrency Regulations Introduce Stablecoin Regime

Tough new rules for stablecoins came into force in the EU this week, with the first parts of regulations for crypto-asset markets being implemented.

While the clarity of the new regulations has been generally welcomed, the regulations impose significant restrictions on the use of dollar-denominated stablecoins, which make up the vast majority of global trading volume.

Mica officially went into effect in May last year. However, the stablecoin regulations came into effect on June 30. The remaining Mica obligations — which apply to cryptoasset service providers — will come into effect later this year.

The passage of stablecoin regulations prompted cryptocurrency firm Circle to register as an electronic money institution with French banking regulator Autorité de Contrôle Prudentiel et de Résolution. The EMI license designates Circle as a compliant stablecoin issuer under the Mica rules, allowing it to passport its licenses in the EU. Circle claims to be the first stablecoin issuer to comply with the regulations.

Although Katalin Tischhauser, head of investment research at Sygnum, admits that “the regulations are too restrictive, as they ban all decentralized stablecoins, as well as income-generating stablecoins. They also limit the use of stablecoins in real-world payments, capping them at 1 million transactions and €200 million per day.”

By being strict with stablecoins pegged to the US dollar, Mica risks having many existing coins deemed non-compliant. Cryptocurrency-focused media outlets like Cointelegraph have reported that cryptocurrency exchanges Uphold, Bitstamp, Binance, Kraken, and OKX have begun delisting stablecoins like Tether or restricting services to EU users. Tether’s dollar-pegged coin, dubbed USDT, is the world’s largest by market capitalization. Tether would need to register in the EU to continue operating.

“There may be some growth due to the fact that institutions will be able to trade cryptocurrencies versus Mica-compliant euro stablecoins. However, the stablecoin market is largely dominated by dollar stablecoins and this is unlikely to change,” Tischhauser says.

“Since Tether is not considered compliant with Mica rules while USD Coin (Circle) is, it is likely that there will be a shift in market share in favor of USD Coin – although crypto trading is dominated by the US and Asia, so Europe may only have a smaller impact.”

Christian Walker, chairman and co-founder of the Stablecoin Standard, a global industry body for stablecoin issuers, describes it as “a balancing act between consumer protection and innovation.”

“I think many of the larger USD-denominated stablecoin issuers will struggle, particularly with transaction limits, given the US dollar’s ​​dominance in cryptocurrencies and its role as a relatively safe haven on-chain for cryptocurrency users. Additionally, interoperability requirements can be complicated to navigate for issuers from jurisdictions that currently lack such regulations,” he says.

Despite these warnings, Walker adds: “Stablecoin regulation is essential for the industry to thrive, and Mica sets a high bar that will likely become an international benchmark as other jurisdictions review their own stances.”

A similar view is shared by many others who see the concept of stablecoins in a positive light.

This week’s launch of the stablecoin will have “major implications for financial institutions” across the EU, “particularly given the enhanced regulatory oversight it will introduce and the requirement for crypto-asset issuers and service providers to obtain authorisation from national competent authorities,” according to Olivier Carré, deputy managing partner, technology and transformation leader at PwC Luxembourg.

“With an initial focus on asset reference tokens and e-money tokens, Mica is laying the foundation for a more structured and secure financial sector,” he added.

Marion Laboure, macroeconomic strategist at Deutsche Bank Research, also sees positive sides to the stablecoin system.

“I think regulation is a positive thing for the industry because a clearer regulatory framework will drive corporate adoption, higher liquidity – and lower concentration; and ultimately help to partially address the volatility issue,” he says.

In The Banker last year, Stefan Berger, a member of the European Parliament who served as Mica’s rapporteur, said the regulation “creates legal certainty for innovation in the distributed ledger sector,” and is intended to protect investors and ensure that investment platforms are not susceptible to manipulation.

As part of the regulation, the EU has introduced various classifications of coins, including e-money tokens, asset-linked tokens, utility tokens, and non-fungible tokens. Berger pointed out that these classifications reflect “the diversity of the cryptocurrency landscape, recognizing the different functions that these assets serve.”

Issuers of stablecoins, such as e-money tokens and asset-linked tokens, are subject to strict Mica requirements to qualify as e-money institutions or apply for authorisation under Article 19. As of 30 June 2024, they must, among other things, obtain authorisation as e-money institutions or credit institutions; provide a white paper detailing key aspects of the token that must be approved by the national competent authority in the home Member State; and undergo rigorous assessments of the suitability of the members of the management body and significant shareholders of the issuers, ensuring that key persons are able to operate within the regulatory framework.

Also this week, crypto-asset service providers offering custody, trading, exchange, order execution and advisory services are now subject to a range of obligations. These include notifying the NCA of their home member state at least 40 business days before they start providing crypto-asset services, obtaining authorisation from the relevant NCA to demonstrate compliance, ensuring consumer protection measures and implementing robust systems to prevent market abuse, ensuring fair and transparent operations.