Today the Digital Euro Association published a report analyzing Europe’s MiCA regulation and its impact on stablecoin issuance. On the one hand, it suggests it could be the foundation for a global stablecoin regulatory model. At the same time, it gives an in-depth critique and suggestions for future enhancements.
For example, it proposes that stablecoins might be worthy of a global body similar to the Basel Committee that oversees banks in order to have more commonality in stablecoin standards. The insights gleaned from MiCA’s implementation could inform those standards.
The paper highlights several areas where it would like to see enhancements. Drawing from a paper co-written by Circle’s Patrick Hansen, it argues that the EU’s significant stablecoin regime may be too harsh.
Separately, MiCAR requires a very high proportion of reserves to be held at banks – 30% for regular stablecoins and 60% for significant ones. This affects profitability and also exposes the stablecoin to credit risk. The collapse of Silicon Valley Bank resulted in a de-peg event for Circle’s USDC.
Another area relates to anti money laundering. Because electronic money tokens are based on another piece of legislation, there’s some debate whether stablecoin issuers only have to perform AML on issuance and redemption, or whether AML by the issuer also applies to secondary market trading.
Challenges for international stablecoin issuers
Additionally, international stablecoin issuers face some challenges in complying with MiCAR. It requires issuers to engage custodians authorized under EU regulations, whereas international stablecoins (asset referenced tokens) may already have foreign custodians. There’s also the complexity of creating a double-issuer structure. For example, Circle’s French subsidiary will issue USDC in Europe.
We’re trying to understand how these two versions of the same stablecoin are fungible given their different backing and the potential for self custody wallets of unknown jurisdiction. But that’s another matter.
Ledger Insights will soon publish a report on bank-issued stablecoins and tokenized deposits. Sign up for notification of its release.
There was one area on the international side we didn’t agree with. MiCAR imposes limits on the scale of foreign currency electronic money tokens (like Tether, USDC) used in the EU. The paper argues this might weaken the USD/EUR trading pair and that “the European economy will be cut off from global trade including investments, exchange of goods and services and financial transactions severely limiting global economic activity.”
We believe this is not the case following a deep dive we published on this topic earlier this week. The limits relate to (most) internal EU usage to pay for goods and services. Crypto trading, non-crypto investments and finance do not count towards the limits. Transactions between an EU and a foreign country (non-EU) are also excluded. For example, if a German manufacturer sells to a French buyer in dollars settling in dollar stablecoins, that counts. If a French buyer pays a U.S. manufacturer in dollar stablecoins, that does not count towards the stablecoin cap.
Nonetheless, the paper outlines many of the gray areas and topics that need consideration both with in the EU and elsewhere.
