What Changes Does MiCA Bring for Crypto Exchanges and Major Stablecoins?

At the end of June, the European Union will begin to apply part of the provisions of the Markets in Crypto-Assets (MiCA) regulation, focusing first on stablecoins-related parts: Titles III and IV, respectively, covering Asset-Referenced Tokens (ARTs) and Electronic Money Tokens (EMTs). 

EU MiCA Regulation Bans USD-Backed Stablecoins In The EU

ARTs can reference anything, including a basket of currencies, with one exception: they cannot reference only one official fiat currency. Such tokens must be classified as EMTs and fall under stricter safety requirements, E-money licensing procedures for the issuers, and foreign currency controls. “Significant" EMTs and ARTs (those with a large customer base, a high market capitalization, or a large number of transactions) are subject to more stringent requirements.

Additionally, MiCA limits the use of all ARTs and EMTs denominated in a currency "that is not an official currency of a Member State" (read: euro) as a means of exchange at 1 million transactions or €200 million per day. To put things in perspective, Tether's USDT, which has around $63 billion in daily trading volume globally, would break the threshold in a few minutes.

These provisions indicate that EU regulation aims to protect its monetary system from the influence of stablecoins pegged to foreign currencies. This is a significant threat to existing stablecoin issuers as their leading tokens are denominated in USD.

If USD-backed stablecoins stop operating in the EU, crypto traders will be first to suffer. Stablecoins are the main bridge between currencies on crypto exchanges and effectively bridge various blockchains without using the legacy banking system.

The most apparent outcome is that euro-denominated stablecoins will replace their dollar-pegged siblings. Europe is the second-largest cryptocurrency economy in the world, reportedly accounting for 18% of global transaction volume, and most likely, the largest issuers like Tether and Circle will do their utmost to keep their share of this market.

Currently, Tether's USDT dominates in centralized exchanges, while Circle USDC is more used in the DeFi segment, for which the application of new MiCA rules is unclear. Both issuers have euro-pegged stablecoins, but there is no guarantee they will manage to meet the MiCA requirements.

Tether hasn’t publicly announced whether they will apply for an electronic money institution license, but Paolo Ardoino said they're working with EU regulators on such an application. Later, though, he expressed concerns over some of the MiCA requirements. Circle has applied for EMI registration in France but hasn’t secured the license yet.

At the moment, there are few MiCA-regulated stablecoins. Their limited liquidity may not be sufficient to meet the demand. The authorized issuers include Monerium, which has $1.3 million in market capitalization, and even smaller Membrane Finance and Quantoz Payments. Other issuers, such as European-based Statis, which issues the biggest euro-pegged stablecoin by market capitalization ($133 million) and aims to receive the EMI license soon, might help in establishing market balance but will not provide enough liquidity to replace the industry giants if they quit the market. 

Centralized Crypto Exchanges Operating in EU Comply With MiCA Regulation By Delisting Unauthorized Stablecoins

The exchanges have reacted differently. Some started preparing in advance. OKX, the world's third-largest cryptocurrency exchange by trading volume, discontinued support for USDT trading pairs in the European Economic Area in March, promising to launch over 30 new euro spot trading pairs. USDT remained available on the platform for EEA-based users to deposit and withdraw.

Cryptocurrency exchange Uphold made the same decision and recently announced that it will end support for six stablecoins, including USDT, for European users.

Binance will restrict the availability of “Unauthorized Stablecoins” for EEA users in some of its products, such as Launchpool and Earn, but the spot trading pairs will remain available during an undefined interim period. The exchange hasn’t specified which stablecoins are unauthorized yet.

Kraken announced that it has no plans to delist USDT in Europe but promised to follow all legal requirements, even those it disagrees with.

So far, there is no clear answer to the question of how the unspoken rules of various crypto exchanges will change in light of the upcoming restrictions. Replacing USD-denominated stablecoins with EUR-denominated ones will fragment liquidity on the inherently global platforms.

Another option is for major exchanges to provide their users with an internal means of exchange, such as a token that is not subject to withdrawal and serves only as a bridge. It is unclear if the provisions of MiCA regulation will apply to such internal transactions.

It is also possible that the conventional USDT and USDC will remain available for EU users, at least in spot trading, but with several restrictions. Even in that case, MiCA's regulations will likely contribute to the growth of EUR-denominated stablecoins, as the inconveniences connected with the restrictions will encourage their adoption among local users.

We will wait for the MiCA provisions to come into effect and will Observe the issuers’ and exchanges’ actions that will follow, as well as possible enforcement measures.