EU prepares for leap of faith in cryptocurrencies

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Hello and welcome to the FT Cryptofinance newsletter. This week we will look at the new EU crypto rules.

The EU’s landmark cryptocurrency regulation will come into force over the weekend, but its distorting effects are already being felt on the market.

The arrival of MiCAR, Markets in Crypto-Assets Regulation, is worth reporting. For better or worse, it is the first stab into a comprehensive framework for exchanging and owning crypto assets or providing related services.

The first two parts of the seven, concerning stablecoins, will come into force on June 30, the remaining ones by the end of the year.

The regulation is intended to “unlock the full potential of cryptoassets” to help businesses and consumers, while applying the same kind of legal protections that consumers of stocks and bonds receive. Its unspoken aim was to box projects like Meta’s ill-fated Libra stablecoin into a narrow regulatory environment.

But on the eve of its grand introduction, MiCAR already appears dated and, critics say, risks hindering innovation and preventing EU citizens and companies from using products available elsewhere in the world.

As with all regulations, MiCAR struggles to keep up with market developments. It does not cover staking, while service providers offering a “fully decentralized” service, without any intermediaries, are outside the scope of the rules.

But it already appears to be having an impact. Last month, US group Paxos announced the creation of Lift, a stablecoin pegged to the US dollar that will offer holders a yield and will be regulated by Abu Dhabi. The EU was a no-go, according to CEO Charles Cascarilla, because regulations were “stifling.”

MiCAR prevents stablecoins from paying any type of interest, including staking rewards. Stablecoin operators like Paxos must also hold at least 30 percent of their reserves in EU-recognized banks, potentially rising to 60 percent depending on the size of the coin.

Nowadays, it is not so easy to find banks willing to accept cryptocurrency-related activities, which creates a problem that is largely beyond the control of the companies that must comply.

MiCAR also limits stablecoin operators to a threshold of 1 million transactions or just €200 million per day. Already, over 95% of all stablecoin activity is in US dollar-denominated coins, such as Tether, USDC, and Dai, and at the time of writing, over $50 billion has been traded in the last 24 hours.

“MiCAR does not reflect the reality on the ground,” said an executive at a stablecoin operator.

It’s also leading to some impressive legal gymnastics. This week Swarm Markets, a Berlin-based crypto group, said it will start trading gold, but with a twist.

MiCAR makes it difficult to launch asset-backed tokens, based on gold and other commodities, which are fungible, so the metal is represented on a blockchain as an NFT. Just like regular gold trading, the metal itself will be located in a vault in London.

“MiCAR does not apply to cryptoassets that are unique and non-fungible with other cryptoassets,” said Timo Lehes, CEO of Swarm.

It also potentially limits other innovations. An emerging trend this year is tokens that act like stablecoins but offer a type of interest to holders for lending them. They include tokenized Treasury funds, managed by the likes of BlackRock and Franklin Templeton, with transactions recorded on blockchains such as Ethereum. Some professional cryptocurrency traders and brokers are exploring their use as collateral in token trading.

MiCAR is an addition to the existing EU markets rules. It is designed to capture financial assets that cannot be covered by major post-2008 EU legislation such as Mifid II.

Tokens that offer a return similar to that of a security, such as a staking reward, would fall under Mifid II rather than MiCAR, regulatory experts say, and that requires most securities to be recorded in book-entry form in a central securities depository.

This definition could be problematic, as Ethereum may not qualify as an accounting CSD. If a digital CSD is not available, the tokenized security will have to be converted back into an equity security, making the process of getting the product on a blockchain moot.

It’s not impossible, though. On Thursday, KfW issued a three-year, 2.75% coupon digital benchmark bond through Deutsche Borse’s D7 digital platform, with the exchange operator’s custodian Clearstream serving as the central registry tracking ownership.

But this centralized, tightly controlled digital ledger is a far cry from the promised land of decentralized blockchains, widely traded tokens, and the freer movement of money.

MiCAR has other problems. Among these, as with other EU regulations, are enforcement issues with the EU’s financial services passport system, which allows companies to sell services approved by a regulator in all 27 countries. Historically, some companies have sought the regulator most favorable to their business.

It is sometimes said of European regulations that even the little-studied parts are never repealed, but only improved. In the coming months the new European Commission will define its agenda for the next five years. Expect “further improvements to the digital finance strategy” to be part of it.

What do you think? Email me at philip.stafford@ft.com

Weekly highlights

• Solana’s price rose more than 8% on Thursday, according to fund manager VanEck has applied with US regulators for an ETF based on the token. He stated that Solana is a commodity like bitcoin and ether.

• On Monday, Kanav Kariya, who led proprietary trader Jump’s move into cryptocurrency, said he was leaving the Chicago-based group. a post on social media site X, said he stepped down as president of Jump Crypto “with a heavy heart and great enthusiasm.”

Data mining: living for the weekend

Cryptocurrencies may be traded 24/7, but it seems people still like weekends off. The share of average weekly volumes traded on Saturdays and Sundays has continued to decline, and the advent of spot ETFs has only accelerated the trend, according to data from Kaiko Research.

And finally . . .

The 111th Tour de France will kick off this weekend, starting from the Italian city of Florence. To get into the atmosphere, here is the classic by Claudio Chiappucci 1992 tour through the crowds in the mountains to Sestriere. If cycling is not your thing, there is always a truly engaging tour around the largest art collection in the world, that of the Uffizi.

Cryptofinance is edited by Laurence Fletcher. To view previous editions of the newsletter click Here.

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