Why EU stablecoin rules threaten to upend crypto markets – DL News

Opinion article

• MiCA risks leaving the $155 billion stablecoin industry fragmented, warn Hugo Coelho and Mike Ringer.
• The warning comes before the new rules come into force at the end of June.

Hugo Coelho is the digital asset regulation lead at the Cambridge Center for Alternative Finance, and Mike Ringer is a partner and co-lead of the Crypto & Digital Assets Group at CMS. Opinions are their own.

To warn about the impact of the EU’s impending stablecoin regulation, Dante Disparte, head of strategy at stablecoin issuer Circle, sought to distinguish it from a turn-of-the-millennium concept that has entered technological folklore.

“MiCA is not crypto’s Y2K moment that can be ignored,” Disparte he wrote on June 3 on social network X. “Really consequential developments [are] underway for digital assets in the world’s third-largest economy.”

Also known as the “millennium bug”, Y2K refers to the failure associated with the change of the year to 2000 that threatened to create chaos in computer networks around the world.

Y2K was not a hoax and much work was done to avoid its negative consequences. But “the bug didn’t bite”, as the saying goes. Washington Post I put it up the next day, and today it is remembered for the apocalyptic mood and the hysteria surrounding it more than anything else.

The contrast of this between Disparte and what is happening and what could happen to crypto markets when rules for electronic money tokens – the legal name for the single fiat currency that references stablecoins in the EU’s crypto markets regulation – come into force on June 30th, it is ready.

EMTs play critical roles in the crypto asset markets.

They facilitate crypto trading by being on one side of most trading pairs, protect investors from volatility, and provide collateral that powers decentralized applications.

Join the community to receive our latest stories and updates

Any rules that affect their design or restrict their issuance, offering or trading in a market as large as the EU will undoubtedly have an impact.

So far, crypto markets remain undisturbed by MiCA.

According to the Cambridge Digital Money Dashboard, aggregate stablecoin supply is over $155 billion, up from $127 billion in January.

The share of supply per issuer remains largely unchanged, with the two largest stablecoins, USDT and USDC, representing over 70% and 20% of the market, respectively.

Look beyond the statistics and you might see some movement.

Leading crypto service providers have revealed plans to make changes to their services involving stablecoins in the EU in preparation for regulation.

OKX acted first, with the announcement that it would remove USDT from its trading pairs.

Kraken then said it was reviewing its position.

More recently, Binance announced that it would restrict the availability of unauthorized stablecoins to EU users for some services, although not initially in spot trading.

‘So what is it about MiCA that could require stablecoins as we know them to change?’

The inconsistency in responses suggests that there is no shared understanding of the implications of the regulation.

Compared to the weeks and days leading up to the end of the millennium, it could be said that there are far fewer obvious signs of panic, but almost the same uncertainty.

So what is it about MiCA that could require stablecoins as we know them to change?

In our opinion, the main source of disruption will likely be issuer location requirements.

For issuers trying to comply with the rules, this will be a much more difficult adjustment requirement than the prudential requirements, including the requirement to hold at least 30% or – in the case of significant EMTs – 60% of reserves in bank accounts and split them between different local banks.

And it will deal a more immediate blow than strict limits on the use of dollar-denominated stablecoins in the EU.

These were designed to force the market to switch to euro-denominated stablecoins, but there is not much evidence of this yet.

Under MiCA, no EMT may be offered to the public in the EU and no one may request its admission to trading unless it is issued by an entity incorporated in the EU and licensed as a credit or electronic money institution – notwithstanding that the authorization regime for cryptoactive service providers will not come into force until December 30th.

Some of your reservations will also need to be located, as described above.

It is unclear how foreign issuers of stablecoins, such as dollar-denominated ones, which currently dominate the market, can continue to serve EU customers under such a regime.

In theory, issuers could move to the EU and distribute EU-issued stablecoins to the rest of the world. But this is highly unlikely in practice.

MiCA’s stringent prudential requirements would put these issuers at a competitive disadvantage in many markets outside the EU.

It is also difficult to see why other jurisdictions would not take retaliatory measures and require issuers to co-locate in the same way as the EU, thereby fragmenting the market.

An alternative route would be to issue the stablecoin from two parallel entities, one in the EU, from which it would serve EU customers, and the other from abroad, to serve customers in the rest of the world.

This option, often touted in crypto circles, is marked by legal and operational complexities that have not yet been convincingly resolved.

There are basically two challenges to be faced.

The first is to preserve fungibility between two currencies issued by two distinct entities, subject to different regulatory requirements and insolvency regimes, and backed by different sets of assets.

The second is to ensure that EU customers only hold currencies issued by the EU entity, including through secondary market trading.

Although this issue is more visible and imminent in the EU than elsewhere, it would be wrong to dismiss it as an EU oddity.

Jurisdictions such as Japan, Singapore and the United Kingdom have also grappled with the question of how to regulate stablecoins on a global scale.

Regulators need assurances that investors under their supervision have sufficient protections and can redeem their stablecoins at par, even in times of crisis, even when the issuer and reserves are held abroad.

If the history of finance is any guide, this will only be possible—if ever possible—when there is sufficient alignment of rules to allow regulatory deference or equivalence and cooperation between supervisors in different jurisdictions.

Equivalence regimes are more urgent and necessary in the crypto sector than in other sectors, due to the borderless or digital nature of many activities.

Paradoxically, they are also further away due to the embryonic and fragmented regulatory landscape.

For some reason, MiCA is one of the pieces of EU financial services regulation that does not contain any equivalence regime.

The United Kingdom and Singapore also continue to resist equivalence agreements and the effectiveness of Japan’s equivalence mechanism remains untested.

By pioneering cryptocurrency regulation, the EU is exposing the enigma behind global stablecoin regulation.

His blunt approach threatens to displace a $155 billion market.

We will soon know whether, for stablecoins in the EU, June 30, 2024 is the new January 1, 2000, or something worse than that.

Source