Report Highlights Pros and Cons of MiCA Stablecoin Regulation – Ledger Insights

Today, the Digital Euro Association published a report examining the European MiCA regulations and their impact on stablecoin issuance. On the one hand, it suggests that they could be the basis for a global stablecoin regulatory model. At the same time, it provides in-depth criticism and suggestions for future improvements.

For example, he proposes that stablecoins may merit a global body similar to the Basel Committee that oversees banks, in order to have more common ground on stablecoin standards. Insights drawn from the MiCA implementation could inform these standards.

The article highlights several areas where they would like to see improvements. Based on a paper co-authored by Patrick Hansen of Circle, it argues that the EU’s significant stablecoin regime may be too strict.

Separately, MiCAR requires a very large portion of reserves held in banks – 30% for regular stablecoins and 60% for significant ones. This affects profitability and also exposes the stablecoin to credit risk. The collapse of Silicon Valley Bank caused a de-peg event for USDC Circle.

Another area concerns anti-money laundering. Since e-money tokens are based on a different piece of legislation, there is an ongoing debate as to whether stablecoin issuers only have to apply AML upon issuance and redemption, or whether issuer AML also applies to secondary market trading.

Challenges for International Stablecoin Issuers

In addition, international stablecoin issuers face some challenges in complying with MiCAR. It requires issuers to engage custodians authorized under EU regulations, while international stablecoins (asset-linked tokens) may already have foreign custodians. There is also the complexity of creating 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 interchangeable, given their different security features and the potential for self-custody wallets of unknown jurisdiction. But that is another matter.

Ledger Insights will soon publish a report on bank-issued stablecoins and tokenized deposits. Sign up to be notified when it’s released.

There was one area on the international side that we disagreed with. MiCAR places limits on the amount of foreign currency e-money tokens (such as Tether, USDC) used in the EU. The article claims that this could weaken the USD/EUR trading pair and that “the European economy will be cut off from global trade, including investment, the exchange of goods and services, and financial transactions, which will severely limit global economic activity.”

We believe this is not true after the in-depth analysis we published on the subject earlier this week. The limits apply to (most) EU domestic use to pay for goods and services. Cryptocurrency trading, non-cryptocurrency investments, and finance do not count towards the limits. Transactions between the 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.

Nevertheless, the document outlines a number of uncertainties and issues that require consideration both within and outside the EU.