Issuing stablecoins in the EU is maturing
Stablecoins, specifically fiat-backed stablecoins, have a long history of serving as the interconnector between the blockchain-based and the traditional financial systems. In fact, stablecoins are the largest use case built on crypto rails, as measured by transaction volume (1), and enable increasingly better and inexpensive user experiences in international finance through interconnectedness with the traditional financial systems.
Stablecoins have come a long way since they were first introduced on the Bitcoin blockchain as “real coins”, today known as Tether, in 2014. (2,3) With the entry of more professional actors, like Circle, and strongly regulated issuers, like Paxos, the landscape has evolved and is now inviting serious actors to leverage the benefits of stablecoins.
Most of the stablecoins issued today are denominated in the US dollar. (4) This dichotomy between the USD stablecoins and the rest does not reflect the transaction volumes or currency reserves in traditional finance. Now with the European-wide Markets in Crypto Asset Regulation (MiCAR) enforcement beginning in 2024, (5) we are bound to see extreme market dynamic shifts as USD-based stablecoins are, de facto, banned in the EU through imposing supply limits (6) and regulating the interface between blockchain and traditional finance (7).
With MiCAR, the importance and strength of the euro, and other official EU currencies, in the crypto-based systems will increase tremendously. With importance and potential systemic impacts between the two market structures, however, also comes responsibility. And that responsibility is now getting encoded at the issuer level.
Historically, there has not been a unified EU-level framework for dealing with stablecoins, or crypto-assets pegged to a certain currency. Hence, various EU-based stablecoin issuers have opted for a variety of licensing/regulatory schemes, such as Malta’s Virtual Financial Assets Framework, Liechtenstein’s Blockchain Act, or self-stipulated frameworks. Some have neglected the regulatory hurdles completely, choosing to operate in a true cypherpunk way.
MiCAR makes it crystal clear that this needs to stop. Stablecoins can be issued only by either authorised credit institutions or electronic money institutions. (8) As these definitions have been well established in EU-regulation and the former requiring ECB authorisation, there’s likely to be much less gerrymandering at national levels going forward.
This harmonised regulatory framework brings much needed clarity, transparency, and trust to stablecoins. As long as the stablecoin users are able to easily verify the status as an “electronic money token” (EMT), the term used for stablecoins under MiCAR, they should have much stronger risk guarantees than with any other stablecoin. Other forms of stablecoins, such as crypto-backed stablecoins, fall under the asset-referenced token (ART) category in MiCAR, which imposes its own challenges. ARTs, in this context, are stablecoins that purport to maintain a stable value with respect to their reference asset by referencing another value or right – such as wrapped bitcoin or blockspace.
Among the requirements for EMTs, they must be fully backed with assets denominated in the same currency as the stablecoin itself. Furthermore, how the customer-assets backing the EMT are invested is made explicit – reducing high-risk investments with customer money. In fact, the stipulations often make EMTs more secure from a backing perspective than other forms of private money. For example, a euro EMT must hold at least 30% of its backing in cash and the remainder must be invested in highly liquid, low risk, secure instruments denominated in euros. This stands in stark contrast to, for example, how funds in traditional FinTech applications are secured.
MiCAR also brings strong transparency requirements for EMT issuers. For example, significant e-money tokens – that is stablecoins that are sufficiently largely used and interconnected – must publish the results of an independent audit of the reserve of assets every six months.
Other notable requirements are, among others, the guarantee of a 1:1 redeemability of the EMT to its underlying meaning an end to high conversion costs between fiat and blockchain-native money. (9) Furthermore, the whitepaper becomes a much more important item in the EMT toolkit as the issuers become liable for any losses incurred due to their inability to honour the claims made in the whitepaper.
All in all, the requirements improve consumer protections, making EU-based EMT stablecoins the strongest form of money to date, through better transparency and strict regulatory oversight & requirements.
In a harmonised stablecoin future, issuers will need to closely evaluate their competitive advantages. Are they going to invest in transparency, availability, technical robustness, or something else? Which user segment are they going to target? How will they approach interoperability, marketing, and revenue-sharing with customers when granting interest is prohibited? How about DeFi, NFT, CEXes, data markets, on/off-ramps, or real-world assets?
Time will tell which EMTs succeed. If you’d like to ensure your stablecoin is strongly positioned for the new era of European crypto or if you want to provide industry leading transparency to your end-users, get in touch. At DSC Group, we are building tomorrow’s businesses today.
References and footnotes
Data from CoinMarketCap, accessed 15 Sep 2023, available at https://coinmarketcap.com/
Tether, “Tether”, accessed 15 Sep 2023, available at https://tether.to/en/
FinSMEs, “5 Things You Need to Know About Tether The Cryptocurrency”, accessed 15 Sep 2023, available at https://www.finsmes.com/2018/10/5-things-you-need-to-know-about-tether-the-cryptocurrency.html
DefiLlama, “Stablecoins Circulating”, accessed 15 Sep 2023, available at https://defillama.com/stablecoins
Publications Office of the EU, “EUR-Lex - 32023R1114 - EN - EUR-Lex”, accessed during Sep 2023, available at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32023R1114
MiCAR 58(3) states that article 23 applies to “e-money tokens denominated in a currency that is not an official currency of a Member State,” while 23(1) states “Where … the estimated quarterly average number and average aggregate value of transactions per day associated to its uses as a means of exchange within a single currency area is higher than 1 million transactions and EUR 200 000 000, respectively, the issuer shall: (a) stop issuing that asset-referenced token”
Crypto-asset service providers, e.g. centralised exchanges or on/off-ramp providers.
MICAR 48(1)(a)
MICAR 49(4)
