Regulation
Why EU rules on stablecoins threaten to upend crypto markets – DL News
Opinion article
- MiCA risks leaving the $155 billion stablecoin industry fragmented, warn Hugo Coelho and Mike Ringer.
- This warning comes before new rules come into force at the end of June.
Hugo Coelho is Head of Digital Assets Regulation at the Cambridge Center for Alternative Finance, and Mike Ringer is Partner and Co-Head of the Crypto & Digital Assets Group at CMS. Opinions are their own.
To warn of the impact of looming European regulation on stablecoins, Dante Disparte, head of strategy at stablecoin issuer Circle, sought to distinguish it from a turn-of-the-millennium concept that fell by the wayside in technological folklore.
“MiCA is not crypto’s Y2K moment that can be ignored,” Disparte wrote on June 3 on the social network [are] underway for digital assets in the world’s third-largest economy.
Also known as the “Millennium Bug,” Y2K refers to the problem associated with the turn of the year to the year 2000 that threatened to wreak havoc on computer networks around the world.
Y2K was not a hoax and many efforts were made to avoid its negative consequences. But “the insect did not bite”, as the Washington Post Put it on the next day, and today it’s remembered more for the apocalyptic mood and hysteria surrounding it than anything else.
Disparte’s contrast with what is happening and what could happen to crypto markets when rules for e-money tokens – the legal name for single fiat currency referring to stablecoins in crypto markets regulation – EU assets – will come into force. June 30 is appropriate.
EMTs play essential functions in crypto asset markets.
They make trading cryptocurrencies easy, by being on one side of most trading pairs, they protect investors from volatility and provide collateral that powers decentralized applications.
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Any rules affecting their design or restricting their issuance, offering or trading in a market as large as the EU will undoubtedly have an impact.
So far, crypto markets are not disrupted by MiCA.
According to the Cambridge Digital Money Dashboard, the overall supply of stablecoins stands at more than $155 billion, up from $127 billion in January.
The supply share by issuer remains broadly unchanged, with the two largest stablecoins, USDT and USDC, accounting for over 70% and 20% of the market, respectively.
However, look beyond the statistics and you’ll notice some movement.
Major crypto asset service providers have revealed plans to make changes to their services involving stablecoins in the EU in preparation for the regulation.
OKX acted first, announcing that it would remove USDT from its trading pairs.
Kraken then indicated that he was reviewing his position.
Most recently, Binance announced that it would restrict the availability of unauthorized stablecoins to EU users for certain services, but not initially in spot trading.
“So what might require stablecoins, as we know them, to change about MiCA?”
The inconsistency of responses suggests that there is no common understanding of the implications of the regulation.
Compared to the weeks and days before the end of the millennium, one could say that there are far fewer obvious signs of panic, but almost as much uncertainty.
So what is it about MiCA that might require a change to stablecoins as we know them?
In our view, the main source of disruption will likely be the localization requirements imposed on transmitters.
For issuers trying to comply with the rules, this will be a much more difficult requirement to meet than prudential requirements, including the requirement to hold at least 30% or, in the case of large EMTs, 60% of reserves in bank accounts. and distribute them between different local banks.
And it will deal a more immediate blow than strict limits on the use of dollar-denominated stablecoins within the EU.
These were designed to force the market towards 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 person may apply for admission to trading, unless it is issued by an entity incorporated in the EU and authorized as a credit institution or electronic money institution – notwithstanding that the authorization regime for crypto asset service providers will only come into force on December 30.
Some of its reserves will also need to be located, as described above.
It is unclear how foreign issuers of stablecoins, such as those denominated in dollars, which currently dominate the market, can continue to serve EU customers under such a regime.
In theory, issuers could set up shop in the EU and distribute EU-issued stablecoins to the rest of the world. But this is very unlikely in practice.
MiCA’s strict prudential requirements would put these issuers at a competitive disadvantage in many non-EU markets.
It is also difficult to understand why other countries would not retaliate and require issuers to locate in the same way as the EU, thereby fragmenting the market.
An alternative solution would be to issue the stablecoin from two parallel entities, one in the EU, from which it would serve EU customers, the other from abroad, to serve customers from the rest of the world.
This option, often touted in crypto circles, is fraught with legal and operational complexities that have yet to be convincingly resolved.
There are essentially two challenges to overcome.
The first is to preserve fungibility between two coins issued by two separate entities, subject to different regulatory requirements and insolvency regimes and backed by different asset pools.
The second is to ensure that EU customers only hold coins issued by the EU entity, including through secondary market trading.
Although this problem is more visible and more imminent in the EU than elsewhere, it would be wrong to dismiss it as a European oddity.
Jurisdictions such as Japan, Singapore, and the United Kingdom have also grappled with the question of how to regulate stablecoins globally.
Regulators must have confidence that investors under their supervision have sufficient protection and can redeem their stablecoins at par even in times of crisis, even when the issuer and reserves are kept offshore.
If the history of finance is to be believed, this will only be possible – if ever – 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 apart due to an embryonic and fragmented regulatory landscape.
For some reason, MiCA is one of the elements of EU financial services regulation that does not have any equivalence regime.
The UK and Singapore also continue to oppose equivalence agreements, and the effectiveness of Japan’s equivalence mechanism remains to be tested.
As a pioneer in crypto regulation, the EU is exposing the conundrum behind the regulation of global stablecoins.
Its heavy-handed approach threatens to dislocate 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.