An introduction to European stablecoin regulations

Regulation of stablecoins in Europe is, in theory, mostly settled within the EU-wide crypto regulatory framework that has been widely agreed upon.

The Crypto Asset Markets (MiCA) legislation is in the final stages of the negotiation process. Nevertheless, the provisions governing stablecoins have been particularly controversial, particularly regarding caps on the use and issuance of large non-euro stablecoins.

That aside, one basic principle isn’t too different from the US proposals: Stablecoins will need to be 100% backed by fiat currency reserves or highly liquid assets. In EU terms, these will be “operationally separate and isolated in the interests of the incumbent, and will be fully protected in the event of insolvency,” according to a widely cited June 30 report. Twitter feed by Ernest Urtasun, MEP closely involved in the MiCA negotiations.

3/13 Large stablecoins will be subject to strict operational and prudential rules, with restrictions if they are widely used as a means of payment, and a cap of 200 million euros in transactions/day.

— Ernest Urtasun (@ernesturtasun) June 30, 2022

Stablecoin holders will have the right to redeem them, free of charge, from the issuer at any time, the European Council said.

This point is one that European Central Bank President and stablecoin critic Christine Lagarde has been hammering for some time. “This needs to be checked, supervised and regulated so that consumers and users of these devices can really be guaranteed against possible misrepresentations”, Lagarde said during the MiCA process.

Accusing stablecoins of “pretending” to be currencies, she backs a central bank digital currency (CBDC), or digital euro, which would make stablecoins less desirable in payouts.

Two pieces

Stablecoins are divided into two categories: Asset-Referenced Tokens (ART), which are backed by multiple fiat currencies and/or commodities, such as gold. Electronic money tokens (EMT) are backed by a single fiat currency, such as the euro or the dollar.

Beyond that, tokens referenced by assets based on non-European currencies are divided by size, with severe usage limitations imposed on any stablecoin that grows large enough to be “meaningful”.

See also: Crypto Regulation Weekly: Landmark EU MiCA Legislation Hits Stablecoins Hard

Specifically, Urtasun revealed, “large stablecoins will be subject to strict operational and prudential rules, with restrictions if they are widely used as a means of payment, and a cap of 200 million euros in transactions/day.”

This will apply to EMTs backed by non-euro fiat currencies as well as ARTs. The goal is to protect and encourage the use of euro-denominated stablecoins, rather than the dollar-denominated coins that currently dominate the market. At this level, they would be required to stop issuing tokens and take unspecified actions to reduce their usage.

While crypto-assets – the official name for cryptocurrencies under MiCA – will largely be overseen by the European Securities and Markets Authority (ESMA), “significant” stablecoins will also be regulated by the European Banking Authority. This means stablecoins with over 10 million users or 5 billion in circulation.

Issuers of non-euro tokens will need to be present in the EU.

A not so small problem

The biggest issue with the proposed stablecoin regulations is the impact they will have on existing stablecoins. The market capitalization of the big three – Tether’s USDT ($67.5 billion), Circle’s USDC ($52.4 billion) and Binance’s BUSD ($19 billion) – is close behind. $140 billion to date.

Although it is unclear how the €200 million trading volume cap will be measured. Blockchain data firm Chainalysis said that while this only measures transaction activity in the EU crypto market – for example only transactions from European residents – it would “dramatically change the way stablecoins are used”, the company said June 30.

A pair of European blockchain and crypto industry associations, Blockchain for Europe and the Digital Euro Association, were much less subtle, issuing a letter say that the limitations would effectively prohibit the use of the three largest stablecoins.

The chief strategy officer and head of global policy at Circle, USDC issuer, Dante Disparte, had a much more collegial response, saying MiCA’s provisions “may at first glance appear onerous and anti-innovation to critics. of MiCA, but more profoundly, they offer a path for Europe must become a competitive region for the safe and healthy development of an ever-active financial system.

He added that Circle would make its eurocoin stablecoin, EUROC, “MiCA compliant.”

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