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EU stablecoin laws take effect – here are six key concerns as MiCA rolls out – DL News
MiCA Overview
- Stablecoin laws will go live on European markets on Sunday.
- Exchanges delist stablecoins that are not compliant.
- Experts expect market instability and confusion.
Four years ago, the European Union moved to regulate crypto markets with a set of digital finance bills.
Now, on Sunday, the stablecoin rules of the Cryptoasset Markets Regulation will come into force.
Even though this first tranche of MiCA rules marks a historic milestone, the crypto industry is concerned about the start of a period of transformation.
Token issuers and crypto platforms will need to adapt to onerous payment licenses, reserve requirements, and the loss of non-compliant tokens.
“These factors could lead to near-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 practical overview of where MiCA stands, as well as how the industry and regulators are addressing six key points:
Tight deadline
The European Banking Authority is tasked with fine-tuning the implementation details of MiCA’s stablecoin rules.
However, the EBA did not publish its final guidance until 13 June.
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The tight timing is “the biggest pressure point” for the industry, said Jón Egilsson, chairman and co-founder of e-money issuer Monerium. DL News.
An EBA spokesperson said DL News that the agency finalized and published all technical standards for which it was responsible by the June 30 deadline.
She also continues to prepare for her upcoming supervisory duties, the spokesperson said.
Radiation
Stablecoins that do not comply with MiCA rules will be gradually removed from the EU.
Delistings risk causing market disruption, reduced options and liquidity issues, Chaput said.
Bitstamp will delist Tether’s euro-denominated stablecoin, the exchange announced Wednesday. OKX delisted Tether from EU users in March.
Binance said it would restrict unauthorized stablecoins for EU users in some of its services, and Kraken said it was reviewing potential delistings.
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 in force since 2016 and requires platforms managing electronic money to comply with onerous requirements – even more so than crypto asset platforms.
Getting a license could take years.
“We don’t know for sure whether stablecoins are electronic money,” Victor Charpiat, an attorney at Kramer Levin Naftalis & Frankel LLP. “That has a major impact on their tax and accounting treatment.”
Charpiat expressed concern that the provision has not been formally clarified by regulators and that, with few crypto businesses licensed under PSD2, companies will lose customers.
“Many digital asset service providers could be breaking the law starting next Monday, and there is no way to be sure because there is no clarification,” he said.
EBA regulators said they called on the industry to prepare “in a timely manner” for MiCA once it became law a year ago, and provided tools for asking 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 authorized on a case-by-case basis. »
Permissionless networks
Some crypto asset service providers operating and interacting with networks without authorization 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 for the execution of payment transactions.
When users use self-hosted wallets or make transfers to DeFi platforms on different blockchains, businesses may not be able to custody assets as PSD2 intended, Astazi said.
Ceilings for non-euro stablecoins
Issuers of non-euro denominated or multi-asset backed stablecoins are capped.
These issuers must stick to a volume of 200 million euros per day or one million transactions when the token is used as a “means of exchange,” according to MiCA.
“Imposing volume limitations on US dollar-backed stablecoins could lead to a shift to euro-backed alternatives, impacting stablecoin market dynamics,” Chaput said.
There are important exceptions to the thresholds, the EBA clarified in its implementation reports, putting to rest some of the industry’s concerns.
They do not count when the stablecoin is used for trading purposes, as collateral for transactions with financial instruments or used to settle a derivative product.
Issuers can also ignore the thresholds if they have “reasonable grounds” to assume that the transaction is not intended to pay for goods or services, according to the EBA. report.
Local reserves
MiCA requires stablecoin issuers to hold 30% of cash reserves in EU bank accounts, or 60% for large e-money tokens.
These reserves must be spread across several local banks to mitigate concentration risk.
“This will be a more immediate blow than the strict limits on the use of dollar-denominated stablecoins within the EU,” Hugo Coelho, head of digital asset regulation at the Cambridge Centre for Alternative Finance, and Mike Ringer, a partner at law firm CMS, said recently. wrote.
This is a challenge because few banks are willing to use cryptocurrency issuers. And because it is expensive, because it means the funds cannot be used to invest in safe assets.
For Egilsson, this provision undermines the initial promise of cryptocurrencies to operate independently of the banking system.
The opportunity for cryptocurrency is not to depend on the solvency of the bank, he said DL News in March.
“We can work with that. It’s not an obstacle,” he said. “But going forward, this is a problem that will need to be resolved.” »
Inbar Preiss is a legal correspondent at DL News. Do you have a tip? Send him an email at inbar@dlnews.com.