Yesterday, the first parts of the vast EU regulation MiCAR came into force. They mainly concern stablecoins. We explain what they mean and show how they are currently being received.
The EU likes to see itself as the world champion of regulation. That doesn’t necessarily have to be a bad thing, as long as it’s not the only strength the location brings to the table.
With MiCAR, a regulation package for cryptocurrencies came into force yesterday, of which the EU is particularly proud. For years, institutions, representatives, and member states have discussed, designed, haggled, wrestled, and refined to cover all areas of the market as strictly as necessary but loosely enough to allow companies room to breathe.
MiCAR, according to the EU’s grand vision, should „unleash the full potential of crypto-assets,“ since only appropriate regulation gives the market strength.
Andreas Wiebe, who issues the (precious) metal-backed „Edelcoin“ from Switzerland, partially agrees: „From an investor’s perspective, MiCAR is good as it provides security.“ For the issuers, however, it’s „not a quick shot. I already see many problems for companies that lack the financial endurance as start-ups in the crypto industry.“
Wiebe’s perspective might represent the market: There are opportunities, but perhaps even more problems. Since yesterday, things have become serious as the first chapters of MiCAR came into force, Parts III and IV out of a total of VI.
We will explain what this means and provide a little insight into how the market is reacting to it.
The BaFin Now Regulates Issuers of Stablecoins
As of yesterday, the oversight of the issuers of „asset-referenced tokens“ in Germany is under the BaFin. This is what Parts III and IV regulate.
Asset-referenced tokens refer to two types of tokens: Firstly, „E-Money Tokens“ (EMTs), which are a digital representation of conventional currencies like the Euro or Dollar, essentially stablecoins. These are covered by Part IV. Part III, on the other hand, addresses „asset-referenced tokens“ (ARTs), whose value is not linked to fiat money but other assets, such as gold.
True cryptocurrencies like Bitcoin and other tokens, such as utility or governance tokens, fall into a different category and are not yet affected. The new rules will apply to them starting December 30, 2024.
However, issuers of EMTs and ARTs have had to comply with MiCAR rules since yesterday. They need to present certain asset reserves and hold these at specific proportions in EU banks, allowing customers to withdraw their deposited money at any time.
Furthermore, MiCAR sets transaction volume caps. At 200 million euros per day, this limit is so ridiculously low that it effectively equates to a ban for major stablecoins, making it practically impossible for such a coin to ever form in the EU. But the devil is in the details, as we will see later.
In Germany, it is now the BaFin’s responsibility to monitor these issuers. For this, they have formed the „Team ZK“: oversight of payment institutions and crypto businesses. Additionally, they closely cooperate with the European Banking Authority (EBA), the European Securities and Markets Authority (ESMA), the European Central Bank (ECB), and the Deutsche Bundesbank.
So, there is an impressive and powerful regulatory body that has assembled a competent team to oversee, nationwide, in coordination with numerous other authorities, all those issuers of stablecoins and other asset-based tokens – of which there are virtually none.
A No-Go
All in all, it’s debatable whether the EU with MiCAR is genuinely unleashing the „innovation potential“ – or whether they have built a cannon to shoot at sparrows that haven’t even begun to build a nest. At least, globally relevant issuers of stablecoins are hard to find in the EU.
The Financial Times claims, MiCAR already seems „outdated, likely preventing innovation and hindering EU citizens and companies from using products available in the rest of the world.“ At the same time, crucial market aspects, such as NFTs and staking, are either not addressed or inadequately covered by MiCAR. The sparrows are shot if they dare approach the roof, but the hawk is ignored.
The first effects are already showing, reports the FT. Just last month, Paxos, an issuer of stablecoins, announced that „lift,“ an interest-paying token linked to the dollar, would be regulated in Abu Dhabi. The EU was a no-go – because of MiCAR.
The problem is more fundamental. MiCAR apparently prohibits paying interest with stablecoins; additionally, issuers must hold 30 percent of their reserves in EU banks, increasing to 60 percent as they grow. This severely restricts the financial maneuverability of the issuers; it undermines precisely what makes stablecoins such an exciting business right now. „MiCAR has little to do with the reality on the ground,“ FT quotes an unidentified issuer.
Peter Grosskopf of Iron Bank also doubts whether MiCAR is genuinely a major, innovation-driving move. He fears MiCAR will lead to the „delisting of US stablecoins,“ as he explains to Wirtschaftswoche. At least concerning Tether, the world’s largest stablecoin, he is probably not wrong.
As early as April, Tether CEO Paolo Arduini stated, they are neither trying to apply for a license nor planning to do so in the medium term. Essentially, they have given up on Europe, also because the demand from Europe is globally irrelevant. Tether now addresses itself more politely but remains consistent: They have not applied for approval; for this to happen, „strategic adjustments and cooperation with regulators“ would be necessary.
To preemptively avoid trouble with regulators, the first exchanges, such as OKX, have announced suspending Tether trading in the EU; Binance will also limit the „availability of unauthorized stablecoins“ for European users. In contrast, Coinbase and Kraken are more reserved and want to observe developments first.
„The European Crypto Market Will Change Significantly This Year.“
Other players are adapting to the new rules. At Swarm Markets, a Berlin startup that tokenizes Real World Assets (RWAs) – one of the few globally relevant innovation drivers from Germany – MiCAR forces mental gymnastics, reports the FT.
The startup issues, among other things, a gold-backed token. As MiCAR makes it harder to create assets based on fungible assets, Swarm stamps the gold as NFTs onto the blockchain, similar to coins. NFTs are (still) not regulated by MiCAR. This gives Swarm at least one to two years‘ time until the EU directs its regulatory cannons at NFTs.
Circle, however, plays by the rules. The issuer of the second-largest stablecoin, USDC, has obtained a license in Paris as an „Electronic Money Institution.“ This makes Circle the first global stablecoin issuer to comply with MiCAR.
„From today, EU customers can open their Circle Mint Accounts at Circle France to mint and redeem USDC and EURC directly, in a MiCA-compliant manner via standard EU payment systems like SEPA and SEPA Instant,“ rejoices Circle’s EU representative Patrick Hansen.
Yet, even Circle has to engage in some mental gymnastics. While EURC from Circle France is „fully issued,“ USDC is only „minted.” Therefore, the MiCAR rule that 60 percent of reserves must be held in EU bank accounts applies only to EURC, not USDC.
The second bitter pill of MiCAR is the 200 million transaction limit. However, this seems mainly to apply to payments to merchants, rather than investment transactions, which are common in the crypto market. Thus, this pill is much less bitter than it appears at first glance.
For Circle, MiCAR presents a huge opportunity, Hansen explains: „The European crypto market will change significantly this year. Non-compliant stablecoins will disappear from EU exchanges and service providers.“ Circle sees this as a „tremendous opportunity for the growth of EURC and USDC“ and will therefore „intensify efforts in the EU.“ Currently, Hansen is pleased that „only USDC and EURC among the top 50 stablecoins are MiCA-compliant.“
One man’s loss is another’s gain, as is often the case.