MiCA: New Regulations for Stablecoins in Europe
Date: 2024-08-07 Author: Oliver Abernathy Categories: CRYPTO PAYMENTS
The European crypto market is facing new regulations for stablecoins under the adopted MiCA (Markets in Crypto-Assets) regulation. This legislative act adopted by the European Parliament and the Council aims to create a legal framework for crypto assets in the EU. The introduction of MiCA marks a significant step towards stricter control and regulation of the crypto market, especially regarding stablecoins.
Attitudes towards cryptocurrencies: a paradigm shift
Previously, many authorities believed that cryptocurrencies should be regulated in a similar way to traditional financial instruments, without the need for separate legislation. An example of this approach is the well-known statement by Gary Gensler, head of the US SEC, that all crypto assets except Bitcoin are securities.
However, as the crypto market has grown and developed, the attitude of regulators has begun to change. In January 2019, the European Banking Authority (EBA) and the European Financial Markets Authority (ESMA) published a report noting that only a small part of crypto assets falls under the regulation of financial legislation, namely security tokens. The rest of the cryptocurrencies remained in a legal vacuum, which was the beginning of the development of MiCA.
Adoption of MiCA and new rules for stablecoins
The MiCA regulation was adopted on May 31, 2023, the main part of which will enter into force on December 30, 2024. The exceptions are Chapters 3 and 4, concerning the regulation of stablecoins, which entered into force on July 30, 2023.
These chapters reflect the cautious attitude of European authorities towards stablecoins. The European Parliament and the European Central Bank have previously expressed concerns about such assets, citing their high volatility, unverified collateral levels, and unknown issuers.
Stablecoins are Tightly Regulated
MiCA has strict rules for stablecoins. Algorithmic stablecoins are banned, and other types have strict collateral requirements. Issuers are required to hold their own collateral, which must be at least €350,000 or 2% of the reserve fund, or a quarter of the previous year’s fixed overhead, whichever is higher. These funds cannot be mixed with the reserve fund, which must be at least 30% collateralized by the currency to which the stablecoin is pegged. The total collateral must match the amount of stablecoins in circulation.
MiCA introduces the concept of "significant stablecoins", which include projects with a market capitalization of over €5 billion. Such stablecoins must be licensed by the EBA to issue, and they must be 60% backed by fiat currency. This rules out the possibility of stablecoins being fully backed by yield securities.
Problems and criticism
The main problem for stablecoin issuers is not only the amount of funds that must be held as collateral, but also the requirement to keep these funds in European banks. This creates additional risks for issuers associated with storing deposits and undergoing regular audits.
American company Circle, for example, has already received an EMI license to issue stablecoins in the EU, but its CEO Jeremy Allaire expressed concerns about the need to keep up to 60% of the collateral in European banks. In his opinion, this could destabilize the industry, since banks have access to loans, which creates additional risks for stablecoin operators.
The MiCA rules, despite criticism, create clear and understandable conditions for doing business in the cryptocurrency sector in the EU. These rules are designed to protect investors and combat money laundering. The introduction of MiCA makes the European Union one of the first regions with comprehensive legislation for crypto assets, which can serve as an example for other jurisdictions.
