The European Union’s upcoming Markets in Crypto-Assets (MiCA) Regulation, expected to enter into force circa 2024, seeks to establish uniform rules for crypto-asset service providers and issuers within the region.
Comprehensive in its scope, MiCA regulates a number of operations related to crypto assets, which it defines as a "digital representation of a value or a right which may be transferred and stored electronically, using distributed ledger technology or similar technology".
Electronic Money vs Stablecoins
The European Commission explored several options for regulating stablecoins under MiCA. One option was to develop a completely new legislative framework that focused specifically on the risks associated with stablecoins and would seek to impose requirements on both stablecoin issuers and the reserve that backs the stablecoin. Another option was to regulate stablecoins under the existing Electronic Money Directive. However, this was discarded as it was not deemed entirely fit for purpose, or appropriate for managing risks to consumer protection, such as those raised by crypto wallet providers.
To prevent regulatory arbitrage and establish a comprehensive EU framework capable of effectively mitigating the risks identified by the Financial Stability Board, the Commission opted for a combination of both of these options.
Interestingly enough, the widely used term "stablecoin" has not found its place in MiCA document. Instead, EU regulators added two new terms.
E-money tokens vs Asset-referenced tokens
MiCA introduces three subcategories of digital assets, each subject to different sets of requirements. These categories are comprised of two stablecoin variants – "electronic money tokens" (EMTs) and "asset-referenced tokens" (ARTs), as well as a third, catch-all category for various other crypto-assets – utility tokens. Definitions of the two stablecoin categories are quite similar: EMTs are defined as crypto-assets that aim to maintain a steady value by pegging it to one fiat currency that is legal tender, ARTs aim to maintain their value by referencing different types of assets, including one or multiple fiat currencies. The important difference is that EMTs' definition has stricter requirements for redeemability:
Holders of e-money tokens shall be provided with a claim on the issuer of such e-money tokens. Any e-money token that does not provide all holders with a claim shall be prohibited
In contrast, ARTs can impose certain conditions such as liquidity fees on redemptions, limits to the amount of ARTs to be redeemed on any working day, and even suspension of redemptions. Instead, there will be more licensing requirements to ART issuers as well as a cap on the number of transactions and total value:
...for a given asset-referenced token, the estimated quarterly average number and value of transactions per day associated to uses as means of exchange is higher than 1,000,000 transactions and EUR 200 million respectively, within a single currency area, the issuer shall: (i) stop issuing the asset-referenced token;
For comparison, the above mentioned volumes equal roughly to 6 min of Tether's USDT 18.2 trillion transaction volume of 2022.
According to some observers, the stablecoins issued recently in Spain and Finland are aiming at EMT variant, while Tether is closer to ART than to EMT.
The MiCA proposal also makes specific reference to significant EMT and significant ART. Similar to FSB global stablecoin definition, those are stablecoins, that have the potential for widespread international use and high trading volumes, thereby posing risks to financial stability. Additionally, it notes that the Electronic Money Directive does not contain specific provisions for an entity that could potentially become systemic, such as a global stablecoin. This was yet another reason why the Electronic Money Directive alone was not an appropriate choice to regulate stablecoins. To address these risks, MiCA includes additional measures designed to manage the risks to financial stability and orderly monetary policy presented by significant stablecoins.
The authorization process for issuers
The required authorization process for non-decentralized stablecoins will involve applying to the relevant EU-based authority and meeting a range of criteria, including having appropriate governance arrangements in place, sufficient resources to carry out activities, minimum capital requirements, and effective internal control mechanisms.
In addition to the obligations mentioned, MiCA also stipulates a range of measures designed to prevent market abuse. Issuers will, for example, be required to implement robust processes to detect and prevent money laundering and terrorist financing, as well as to monitor and report suspicious activities.
To sum up, the MiCA Regulation represents a significant step forward in the regulation of the cryptocurrency industry in Europe, setting forth stricter requirements for crypto-asset service providers in order to establish its goals of harmonizing EU’s fragmented legislative landscape while addressing the growing sector. A major part of the regulation is devoted to stablecoins, emphasizing the importance of this class of digital assets. However, the current requirements for the stablecoins omit decentralized stablecoins and significantly limit the volume of ARTs – both having already established niches in the market.