What's going on with the EU stablecoins

What happened in June 2024?

Since 30 June 2024, any public offering or admission to trading of stablecoins is subject to a novel regulatory framework which was inspired by the framework already applicable to the public offering and admission to trading of traditional financial instruments on European soil.

It can be said that since its inception, MiCA reached its first major milestone in June 2024 by enforcing stricter rules for stablecoin issuance and the entire crypto industry.

Now crypto companies are racing to comply with the European Union's Markets in Crypto Assets (MiCA) regulation rules, which require companies to be authorised in at least one EU Member State.

As a consequence, Coinbase shared a statement announcing that they are committed to compliance with the European regulation of crypto asset service providers and that they intend to restrict the provision of services to European Economic Area users in connection with stablecoins that do not meet the MiCA requirements by December 2024. Simply put, Coinbase wants to delist stablecoins that didn't meet MiCA's rules.

The new regime has sparked many debates in recent weeks, but before making any conclusions, let's see what MiCA coming into force means and whether there is a real danger for the future of stablecoins.

If you want to better understand all terms tossed around the crypto industry, education is the key. Check out available courses at our Learn Crypto Academy.

Is a new GDPR situation on the rise?

While it is obvious that MiCA is not a privacy regulation, let’s go down the memory lane when the GDPR was coming into force. The GDPR struck down a global benchmark for data privacy which forced many companies worldwide to comply with its standards instead of facing penalties or being unable to operate within the EU internal market. And they all had a limited time frame to comply.  

In that sense, MiCA’s coming into force mirrors the introduction of the GDPR back in 2016. The EU’s data protection regulation now presents a standard for data privacy, and everyone wonders if MiCA can do the same for crypto assets.

The European Crypto Assets Regulation

As mentioned above, the European Union's Markets in Crypto Assets (MiCA) regulation refers to the applicable regulatory framework for crypto assets regulation.

Since its inception back in 2020, the MiCA regulation has shed a new light on the crypto industry in the European Union. So, let’s look at the regulation’s main points. 

MiCA applies to crypto businesses or crypto asset service providers that include exchanges, custodial wallets, crypto trading platforms as well as crypto consulting companies and portfolio managers. 

When it comes to assets, the regulation covers three types of assets such as asset-referenced tokens, e-money tokens, and other tokens, including utility digital tokens. 

The European crypto regulatory framework laid down a clear roadmap for its coming into force and adoption. Officially, the regulation entered into force 20 days after its publication in June 2023.

However, Titles III and IV which cover asset-referenced tokens and e-money tokens began to apply in June 2024, considering that the European Securities and Markets Authority (ESMA), in collaboration with the European Banking Authority (EBA) had to prepare delegated acts till that time. 

It is expected that by December 2024, the rest of the regulation should be in full effect. 

To get to know the MiCA regulatory framework better, why not read this article: 'What is Markets in Crypto Assets (MiCA)? Europe's Crypto Law'.

How to read the MiCA regulation's stablecoin provisions?

The MiCA regulation doesn’t use the term stablecoin often. Instead, it refers to stablecoins as asset-referenced tokens or e-money tokens. 

If you still don't understand the stablecoin concept, we suggest reading this article: 'What is a Stablecoin?'.

The regulation lists these two kinds of stablecoins so let’s start with the basics. 

Asset-referenced tokens refer to types of crypto assets that are not electronic money tokens and that purport to maintain a stable value by referencing another value or right or a combination thereof, including one or more official currencies. 

Simply put, asset-referenced tokens are stablecoins which aim to stabilise their value by referencing multiple assets such as commodities, a basket of currencies or other crypto assets. For example, DAI and PAXG are asset-referenced tokens. 

On the other hand, the regulation stated that electronic money tokens or e-money tokens present a type of crypto asset that purports to maintain a stable value by referencing the value of one official currency. Fiat-backed stablecoins such as USDT or USDC fall within this category. 

So, if you want to check MiCA provisions regarding a certain type of stablecoin, first examine whether it is an asset-referenced token or e-money token. When you find out the category it belongs to, go to Title III or IV of the regulation. 

Keep in mind that this EU’s regulation applies to crypto assets, irrespective of how the issuer intends to maintain a stable value of the asset in question, and that the same applies to algorithmic stablecoins.

When are stablecoins deemed significant?

MiCA states that stablecoins, either asset-referenced tokens or e-money tokens, are deemed significant when they meet or are at least likely to meet particular criteria such as a broad user base, a large number of transactions, or a high market cap.  

If they meet these criteria, it means that the stablecoin in question is being used by a broad number of holders and has the potential to raise certain challenges regarding financial stability, monetary policy transmission or even monetary sovereignty.  

That is why the regulators thought that such stablecoin issuers should be subject to more stringent requirements than those that are not deemed significant. These requirements include, for example, interoperability requirements, higher capital requirements, and a strict liquidity management policy.  

Can stablecoins be considered securities? To find out more about the SEC v Binance case in the United States and why Circle filed a court motion, take a look at this article: 'Hunting down securities: Are stablecoins standing outside the securities' circle?'.

The powers granted to the European Banking Authority (EBA)

The regulation gives the European Banking Authority several powers over crypto asset service providers.  

Regarding stablecoin issuers, this legal document states that EBA needs to establish a college of supervisors for each issuer of significant asset-referenced tokens or e-money tokens. The members of the college of supervisors should include other competent authorities.  

Furthermore, EBA has the power to carry out on-site inspections, impose fines, and take supervisory measures as well as charge fees to issuers of significant asset-referenced tokens and e-money tokens with the amount of fee being proportionate to the size of their reserve of assets or the amount of funds received in exchange for the significant e-money tokens.

Limits imposed by MiCA regulation

Tougher regulations and new requirements are expected to impact the EU and global stablecoin markets with non-compliant stablecoin issuers potentially facing sanctions from competent authorities.  

Even though the effect of these new rules is still unknown, all limitations are clearly stated. For example, stablecoin issuers must guarantee that the reserve assets are securely and effectively managed as well as segregated from the issuer’s assets and not pledged as collateral.  

However, requirements may differ whether a stablecoin falls within the asset-referenced token or e-money token category. Let’s explain this briefly.

Rules for asset-referenced tokens

Asset-referenced tokens can be offered by either legal persons or undertakings established within the EU and authorised by their competent authorities or by credit institutions permitted to offer asset-referenced tokens. 

If the potential stablecoin issuer is not a credit institution, the entire process of authorisation includes a proper examination of the issuer’s management structure as well as a screening of shareholders with qualifying holdings.  

Potential stablecoin issuers must encompass a good governance structure, meet its prescribed fund requirements as well as create and manage a reserve of assets to cover risks. 

A stablecoin issuer established and authorised in one Member State is permitted to operate across the EU. The issuer of asset-referenced tokens can offer them to the public or seek admission to trading. 

On the other hand, if a stablecoin issuer is a credit institution authorised under the Capital Requirements Directive (CRD) IV, it is exempted from seeking authorisation under the MiCA regulation, but still needs to comply with prescribed requirements. 

Before offering tokens to the public or seeking admission to trading, stablecoin issuers must lay down a white paper with certain requirements, all set out in MiCA’s text. The European regulation introduced liability against issuers for the information contained in the white paper in case such data is found to be unclear, incomplete, misleading, or unfair. 

Additionally, issuers of asset-referenced tokens are subject to several obligations prescribed by the regulation such as acting with honesty, fairness, and professionalism, ensuring that all market communications are fair, clear, and consistent with its white paper, along disclosing conflicts of interest and maintaining efficient and transparent procedures for handling complaints of token holders.

Rules for e-money tokens

In contrast to asset-referenced tokens, only authorised credit institutions or electronic money institutions can offer e-money tokens to the public or seek admission to trading within the Union. 

The formalities are similar- issuers of e-money tokens must create and publish a white paper that contains all elements prescribed by MiCA. Issuers also must comply with standards for communications and can be held liable for white papers that contain incomplete, unfair, unclear, or misleading pieces of information. 

Unlike issuers of asset-referenced tokens, electronic money token issuers must keep at least 30% of the funds received from the issuance of tokens in a separate account with a credit institution and invest the remaining funds in low-risk assets that can qualify as liquid financial instruments. 

In case the e-money token issuer can be deemed significant, the competent authority shall be the European Banking Authority (EBA) with the right to supervise the issuer and lay down additional obligations. 

For example, Circle, the second-largest stablecoin issuer by market cap, obtained a French e-money licence in July 2024. That means that both its USDC and EURC tokens can be issued in the EU.

Delisting stablecoin issuers

On 4 October 2024, the news spread that Coinbase will delist all stablecoins that don’t comply with the EU legislation by the end of 2024.

A Coinbase spokesperson stated that the company is committed to regulatory compliance as it aims to restrict the provision of services to EEA users linked with stablecoin that are not compliant by 30 December 2024.

The company further stated that users in the EEA will soon get the option to convert their assets into compliant stablecoins, such as Circle’s USD coin. 

At the time of writing, there is a sprint to achieve compliance as other crypto exchanges, such as Binance, Bitstamp, OKX, and Uphold, have taken steps to meet MiCA’s requirements regarding stablecoins.

Is there a future for stablecoins in Europe?

MiCA didn’t just come out of the blue- it is believed that the creation of this legal document was impacted by certain events. For example, the 2017 Initial Coin Offering (ICO) hype or the 2019 Libra project highlighted the need for transparency and regulatory clarity to hinder fraud, minimise financial risks and protect customers and investors. 

Unregulated stablecoins are dominating crypto markets and MiCA plans to shift this balance, at least by making exchanges delist non-compliant stablecoins.  

Like the implementation of the GDPR and data protection safeguards, non-compliant stablecoin issuers could be forced out of the EU market entirely. 

However, MiCA is just coming into full effect, and some things are still uncertain. For example, considering that compliance is supervised and enforced by EU national authorities, it is unknown how each authority will understand and implement theoretical rules.  

To sum it up, MiCA’s efficiency in practice will depend on a transparent and consistent implementation by competent authorities that doesn’t leave room for interpretation, and whether these authorities manage to lay down clear guidelines for crypto companies to adhere to. 

The information in this article is for educational purposes only and should not be construed as legal advice on any matter.