Europe’s stablecoin laws are going live — here are six key concerns as MiCA rolls out

Four years ago the European Union set out to regulate crypto markets with a bundle of digital finance bills.

Now on Sunday, the Markets in Crypto-Assets regulation’s stablecoin rules will go live.

Even as this first tranche of MiCA rules marks a historic milestone, the crypto industry is concerned as a transformational period gets under way.

Token issuers and crypto platforms will need to adjust to onerous payments licences, reserve requirements, and losing tokens that don’t comply.

“These factors could lead to short-term instability and market confusion as the ecosystem adapts to the new regulatory environment,” said Laura Chaput, head of regulatory compliance at Keyrock, a market maker.

Here’s a handy rundown on the state of play in MiCA, plus how industry and regulators are dealing with six key points:

Tight deadline

The European Banking Authority is responsible for ironing out the implementation details for MiCA’s stablecoin rules.

However, the EBA only issued their final guidance on June 13.

The tight timing is “the biggest pressure point” for the industry, Jón Egilsson, chair and co-founder of e-money issuer Monerium, told DL News.

An EBA spokesperson told DL News that the agency finalised and published all of the technical standards it was responsible for before its given deadline on June 30.

It also continues to prepare for its supervisory tasks ahead, the spokesperson said.

Delistings

Stablecoins that don’t comply with MiCA rules will be phased out from the EU.

The delistings risk causing market disruption, reduce options and liquidity issues, Chaput said.

Bitstamp will delist Tether’s euro stablecoin, the exchange said on Wednesday. OKX delisted Tether for EU users in March.

Binance said it would restrict unauthorised stablecoins for EU users in some of its services, and Kraken said it is reviewing potential delistings.

E-money licence

MiCA defines e-money tokens as electronic money. This drags in another European regulation, known as the Payment Service Directive.

This law’s second iteration — hence the sobriquet PSD2 — has been enforced since 2016 and forces platforms handling e-money to comply with onerous requirements — more so than crypto asset platforms.

Getting a licence could take years.

“We do not know with certainty if stablecoins are electronic money,” Victor Charpiat, lawyer at Kramer Levin Naftalis & Frankel LLP. “That has a major impact on their tax and accounting treatment.”

Charpiat raised concerns that the provision was not formally clarified by regulators, and as few crypto firms hold a licence under PSD2, businesses will lose clients.

“Many digital asset service providers will potentially breach the law as from next Monday, and there is no way to be certain because there is no clarification,” he said.

Regulators at the EBA said that they called on the industry to prepare “on a timely basis” for MiCA once it became law one year ago, and provided tools to ask questions.

Whether a platform needs a payment service licence for e-money token transactions depends on its activities, said the EBA spokesperson. “They would be licenced by case-by-case assessment.”

Permissionless networks

Some crypto asset service providers operating and interacting with permissionless networks will not be able to comply with requirements under PSD2, said Tommaso Astazi, head of regulatory affairs at Blockchain For Europe trade association.

For example, the law requires payment platforms to safeguards funds received for the execution of payment transactions.

When users use self-hosted wallets or transfer on DeFi platforms across different blockchains, firms might not be able to custody the assets the way PSD2 says they should, Astazi said.

Caps on non-euro stablecoins

Issuers of non-euro denominated stablecoins or stablecoins backed by several assets are capped.

These issuers need to stick to a volume of €200 million a day or one million transactions when the token is used as a “means of exchange,” according to MiCA.

“The imposition of volume limitations on US dollar-backed stablecoins could drive a shift towards euro-backed alternatives, impacting the dynamics of the stablecoin market,” Chaput said.

There are significant exceptions to the thresholds, the EBA clarified in their implementation reports, putting some industry concerns to rest.

They don’t count when the stablecoin is used for trading, as collateral for transactions with financial instruments, or used to settle a derivative.

Issuers can also overlook the thresholds if it has “reasonable grounds” to assume the transaction is not to pay for goods or services, according to the EBA report.

Local reserves

MiCA requires stablecoin issuers to hold 30% of the reserves in cash in EU bank accounts, or 60% for significant e-money tokens.

These reserves need to be split in several local banks to mitigate concentration risk.

“It will deliver a more immediate blow than the hard limits on the use of dollar-denominated stablecoins within the EU,” Hugo Coelho, digital asset regulation lead at the Cambridge Centre for Alternative Finance, and Mike Ringer, partner at law firm CMS, recently wrote.

This is a challenge because there are few banks that agree to bank crypto issuers. And because it is costly since that means the funds cannot be used to invest in safe assets.

For Egilsson, this provision takes away from crypto’s original promise of operating independently of the banking system.

Crypto’s opportunity is not to depend on the solvency of the bank, he told DL News in March.

“We can work with it. It’s not a deal breaker,” he said. “But in the future, this is an issue that has to be addressed.”

Inbar Preiss is a Regulation Correspondent at DL News. Got a tip? Email her at inbar@dlnews.com.