The MiCA stablecoin regime and its remaining challenges: part 1

Transaction volumes show that stablecoins are currently the largest use case for cryptoassets. June 30, 2024 will therefore mark a major milestone for the regulation of crypto-assets in Europe – and potentially beyond – with the entry into force of the “stablecoin regime” of the Markets in Crypto-Assets (MiCA) Regulation. This regulation requires issuers (and other persons) to have a MiCA license to publicly offer or trade asset-referenced tokens (ART) or electronic money tokens (EMT) within the European Union, without any period of transition.

MiCA represents a significant shift towards a comprehensive regulatory framework including prudential and conduct requirements for crypto asset issuers and crypto asset service providers (CASPs) within the EU. Previously, frameworks focused only on anti-money laundering and countering the financing of terrorism (AML/CFT). MiCA aims to unify the currently fragmented regulatory landscape by establishing harmonized rules, ensuring legal certainty, protecting consumers and investors and supporting the integrity and stability of the European financial system while fostering innovation.

While the stablecoin regime comes into force at the end of this month, the full CASP regulatory framework will become applicable six months later, on 30 December 2024. The European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) have undertaken extensive consultations on Regulatory Technical Standards (RTS), Implementing Technical Standards (ITS) and Guidelines to help firms better understand regulatory expectations in order to comply with the MiCA framework.

In this blog, we look specifically at MiCA’s stablecoin regime, including:

• On-chain data related to stablecoin usage and overview of MiCA’s stablecoin regime (Part 1)
• The main differences between ARTs and EMTs, and what is required by issuers (part 2)
• Remaining practical challenges and legal uncertainty of this regulatory framework (Part 3)

Part 1: What on-chain data tells us about stablecoins

While Bitcoin accounts for about 50% of the total crypto asset market capitalization of about $2.2 trillion, it represents only a smaller part of the overall transfer volume – around 10%. By 2023, the overall on-chain transaction volume will reach $10 trillion, with stablecoins accounting for 60% of this volume (see Figure 1). This translates to a global daily average of $17.4 billion transferred via stablecoins.

Figure 1: USD value transferred on-chain per month

Chainalysis data further indicates that 1.5 million transfers are made daily using stablecoins, 91% of which are under $10,000. Thus, the majority of transaction volume is in lower denominations, suggesting substantial retail usage of stablecoins.

Additionally, stablecoins are now being held for increasingly longer periods at a receiving wallet address before being transferred to another wallet address, around 40 weeks on average (see Figure 2). This is part of a more structural trend, as more and more people holding cryptoassets are doing so for longer periods, expecting positive price movements. This trend is also typically more pronounced in bear markets, which see less trading activity. However, you can also see on the right side of the chart the cyclical impact of the current bull market, with average holding periods already slightly shortened.

Figure 2: Average number of weeks of assets held, i.e. has not left the receiving address

In our recent Webinar on political momentum we also discuss these trends with Dimitrios Psarakis And Philippe Gradwell.

The MiCA stablecoin regime

MiCA defines crypto-assets and distinguishes three types:

1. asset referenced tokens (ART),
2. electronic money tokens (EMT) and
3. other tokens that are neither ART nor EMT.

The main difference between ARTs and EMTs lies in the underlying connection:

• ART in Title III, it is a type of cryptographic asset that is not an electronic money token and that claims to maintain a stable value by referencing another value (e.g., gold and cryptoassets) or a right or a combination thereof, including one or more official currencies (e.g., a basket of currencies).
• EMT Under Title IV, it is a type of crypto asset that claims to maintain a stable value by referencing the value of an official currency.

The rules applicable to EMTs and ARTs (referred to in this blog as “stablecoins” unless otherwise noted) come into effect on June 30, 2024.

The third category of tokens under MiCA is “other tokens,” such as Bitcoin or Ether. The regulatory requirements for these “other tokens” will come into force on December 30, 2024, alongside the regulatory framework for CASPs that offer one or more of the ten MiCA specific services.

As for “algorithmic stablecoins”, which aim to maintain a stable value by exploiting a supply and demand system managed by an algorithm, these could fall within the definition of an ART or an EMT, and therefore, MiCA specifies that the issuers of these tokens are required to follow the respective rules. If they do not fit these definitions, the issuers must still follow the rules of “other tokens”.

Finally, it should be noted that MiCA excludes from its scope tokens already subject to other regulatory frameworks, such as those representing financial instruments (e.g. stocks, bonds and derivatives) governed by the Directive on EU Markets in Financial Instruments (MiFID).

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