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Europe’s stablecoin laws are in place – here are six key concerns as MiCA launches – DL News
MiCA Summary
- Stablecoin laws come into force for European markets on Sunday.
- Exchanges are delisting non-compliant stablecoins.
- Experts expect instability and confusion in the market.
Four years ago, the European Union decided to regulate crypto markets with a package of digital financial accounts.
Now, on Sunday, the Crypto Asset Markets regulation stablecoin rules will come into effect.
Although this first installment of MiCA rules represents a historic milestone, the cryptocurrency industry is concerned that a period of transformation is beginning.
Token issuers and cryptocurrency platforms will need to adjust to burdensome payments licenses, reserve requirements, and the loss of non-compliant tokens.
“These factors can 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 helpful summary of the MiCA situation, plus how the industry and regulators are addressing six key points:
Tight deadline
The European Banking Authority is responsible for defining the implementation details of the MiCA stablecoin rules.
However, the EBA only issued its final guidance on 13 June.
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The tight schedule is “the biggest pressure point” for the industry, said Jón Egilsson, president and co-founder of electronic currency issuer Monerium. DL News.
An EBA spokesperson said DL News that the agency finalized and published all technical standards for which it was responsible before the deadline set on June 30.
He also continues to prepare for his future supervisory duties, the spokesperson said.
Exclusions
Stablecoins that do not comply with MiCA rules will be phased out from the EU.
The exclusions risk causing market disruptions, reduced options and liquidity issues, Chaput said.
Bitstamp will delist its euro-pegged stablecoin Tether, the exchange said Wednesday. OKEx delisted Tether for EU users in March.
Binance said it would restrict unauthorized stablecoins for EU users on some of its services, and Kraken said it was reviewing potential exclusions.
Electronic money license
MiCA defines e-money tokens as electronic money. This brings with it another European regulation, known as the Payment Services Directive.
The second iteration of this law – hence the nickname PSD2 – has been applied since 2016 and forces platforms that manage electronic money to comply with onerous requirements – more so than crypto asset platforms.
Getting a license can take years.
“We don’t know for sure whether stablecoins are electronic money,” said Victor Charpiat, an attorney at Kramer Levin Naftalis & Frankel LLP. “This has a big impact on your tax and accounting treatment.”
Charpiat raised concerns that the provision has not been formally clarified by regulators, and because few cryptocurrency companies hold a license under PSD2, companies will lose customers.
“Many digital asset service providers will potentially violate the law starting next Monday, and there is no way to know for sure because there is no clarification,” he said.
EBA regulators said they had called on industry to prepare “in a timely manner” for MiCA as soon as it became law a year ago, and provided tools to ask questions.
Whether a platform needs a payment service license for e-money token transactions depends on its activities, the EBA spokesperson said. “They would be licensed on a case-by-case basis.”
Permissionless networks
Some crypto service providers that operate and interact with networks without permission will not be able to comply with PSD2 requirements, said Tommaso Astazi, head of regulatory affairs at trade association Blockchain For Europe.
For example, the law requires payment platforms to protect funds received to execute payment transactions.
When users use self-hosted wallets or transfer on DeFi platforms between different blockchains, companies may not be able to custody assets the way PSD2 says they should, Astazi said.
Limits on stablecoins outside the euro
Issuers of non-euro-denominated stablecoins or stablecoins backed by multiple assets are limited.
These issuers need to limit themselves to a volume of 200 million euros per day or one million transactions when the token is used as a “medium of exchange,” according to MiCA.
“Imposing volume limitations on US dollar-backed stablecoins could lead to a shift towards euro-backed alternatives, impacting the dynamics of the stablecoin market,” Chaput said.
There are significant exceptions to the limits, the EBA clarified in its implementation reports, allaying some industry concerns.
They do not count when the stablecoin is used for trading, as collateral for financial instrument transactions, or used to settle a derivative.
Issuers can also ignore the limits if they have “reasonable grounds” to assume that the transaction is not to pay for goods or services, according to the EBA. report.
Local reservations
MiCA requires stablecoin issuers to hold 30% of cash reserves in EU bank accounts, or 60% for significant e-money tokens.
These reserves need to be divided between several local banks to mitigate concentration risk.
“This will deal a more immediate blow than strict limits on the use of dollar-denominated stablecoins in the EU,” Hugo Coelho, digital asset regulation lead at the Cambridge Center for Alternative Finance, and Mike Ringer, partner at law firm CMS, said. recently he wrote.
This is a challenge because there are few banks that agree to issuers of crypto banking. And because it is expensive, it means that the funds cannot be used to invest in safe assets.
For Egilsson, this provision nullifies the cryptocurrency’s original promise to operate independently of the banking system.
Crypto’s opportunity is not to depend on bank solvency, he said DL News in March.
“We can work with that. It’s not a problem,” he said. “But in the future, this is an issue that needs to be addressed.”
Inbar Preiss is a regulatory correspondent for DL News. Have a tip? Email her at inbar@dlnews.com.