MiCA’s stablecoin regime takes effect amid uncertainty

The MiCA stablecoin regime came into effect yesterday. However, its implementation was met with some uncertainty and challenges regarding the scope, application, and impact of the new rules.

What is MiCA?

MiCA, or the Markets in Crypto-Assets Regulation, is a comprehensive regulatory framework for crypto assets and related services across EU countries. MiCA aims to foster innovation, ensure consumer protection, maintain market integrity, and support financial stability in the EU crypto market.

The MiCA proposal was introduced in 2020, with its final text approved by the members of the European Council in October 2022. Following its publication in the Official Journal of the EU in November 2022, MiCA was voted into law last year.

MiCA has many parts and will be fully implemented over the next two years. The regulation started to apply in a phased manner, with the stablecoin regime (Titles III and IV) coming into force on June 30 this year (yesterday).

MiCA defines and categorizes crypto-assets into three main types: asset-referenced tokens (ARTs), e-money tokens (EMTs), and other tokens. The regulation applies to the issuance, trading, and provision of services related to these crypto-assets within the European Economic Area (EEA).

The full regulatory framework for crypto asset service providers (CASPs) will become applicable six months after the stablecoin regime, on December 30.

How does MiCA affect stablecoins like USDT and USDC?

Under MiCA, stablecoin issuers must obtain authorization and be licensed by the relevant national authorities in the EU.

Stablecoins deemed “significant” based on a set of quantitative and qualitative indicators will face additional and significantly increased prudential requirements. This includes higher capital requirements, liquidity buffers, and risk management controls.

These stablecoins will also fall under the direct supervision of the European Banking Authority (EBA) rather than national authorities.

Stablecoin issuers must maintain sufficient reserves to back the value of the tokens they issue, with strict rules on the composition and quality of those reserves.

Other key requirements include transparency, disclosure, and consumer protection.

Ongoing challenges and uncertainties

Licensing requirements are one of the key challenges for stablecoin issuers.

Stablecoin issuers in Europe must obtain an electronic money license (e-money license) or a banking license. This process is typically expensive and time-consuming.

Stablecoin companies can partner with a European bank with an e-money license instead of applying for a license, but this comes with other complexities, like having to keep assets in these banks.

As of June 30, the current status of e-money license applications amongst stablecoin issuers remains unknown.

Beyond licensing requirements, MiCA introduces additional uncertainty through its issuance restrictions.

Companies cannot issue more stablecoins if the stablecoin surpasses a daily threshold of 1 million transactions used as a medium of exchange or a total value exceeding €200 million (approximately $215 million).

It is, however, unclear how these issuance restrictions are measured. While both Tether (USDT) and Circle (USDC) offer European variants, a large portion of European users continue to use USDT and USDC. This raises questions about whether the restrictions apply to all USD-backed stablecoins or solely those denominated in euros.

Is USDT being delisted?

Tether’s stablecoin USDT has become the topic of discussion as the stablecoin regime is now effective.

Tether has stated that it will not apply for an e-money license or partner with a European bank that has one due to unfair regulation, whereas Circle is in the process of applying.

OKX was the first to take action as it ended support for USDT trading pairs in the EU in March. However, the exchange will continue to support other stablecoins, such as USDC and euro-based pairs.

Last month, crypto exchange Uphold announced it would discontinue support for several stablecoins, such as Tether (USDT), Dai (DAI), and Frax Protocol (FRAX), in compliance with MiCA.

Following Uphold, Bitstamp said it would delist EURT, Tether’s EUR-denominated stablecoin while other coins are unaffected now.

Kraken said it was reviewing USDT’s status, including potential delisting. However, the exchange noted that it would continue to support USDT until further notice.

Binance will restrict USDT services. However, this change does not affect normal spot trading.