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European Stablecoin Laws Are Coming Into Effect: Here Are Six Key Concerns As MiCA Launches – DL News
MiCA Summary
- Stablecoin laws will come into force on Sunday for European markets.
- Exchanges are delisting stablecoins that are not compliant.
- Experts expect instability and confusion in the market.
Four years ago, the European Union decided to regulate cryptocurrency markets with a series of digital finance bills.
The stablecoin rules of the Cryptocurrency Markets Regulation will come into force on Sunday.
While this first tranche of MiCA regulations marks a historic milestone, the cryptocurrency industry is concerned as a period of transformation is about to begin.
Token issuers and crypto platforms will have to adjust to burdensome payment licensing, reserve requirements and the loss of non-compliant tokens.
“These factors could lead to short-term instability and confusion in the market as the ecosystem adapts to the new regulatory environment,” said Laura Chaput, head of regulatory compliance at Keyrock, a market maker.
Here’s a helpful summary of the current state of MiCA, as well as how industry and regulators are addressing six key issues:
Close deadline
The European Banking Authority is responsible for defining the implementation details of the rules for the MiCA stablecoin.
However, the EBA only published its final guidelines on 13 June.
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The tight timeline is “the biggest pressure point” for the sector, said Jón Egilsson, president and co-founder of electronic money issuer Monerium. DL News.
An EBA spokesperson said DL News that the agency finalized and published all the technical standards for which it was responsible before the June 30 deadline.
The agency also continues to prepare for the oversight tasks that lie ahead, the spokesperson said.
Cancellations
Stablecoins that do not comply with MiCA rules will be phased out by the EU.
Chaput said the cancellations risk causing market disruption, reducing options and causing liquidity issues.
Bitstamp will delist Tether’s euro stablecoin, the exchange said on Wednesday. OKX delisted Tether for EU users in March.
Binance said it would restrict the use of unauthorized stablecoins for EU users in some of its services, while Kraken said it was evaluating potential delistings.
Electronic money license
MiCA defines e-money tokens as electronic money. This leads into another European regulation, known as the Payment Services Directive.
The second iteration of this law, hence the name PSD2, has been in force since 2016 and forces platforms that manage electronic money to comply with onerous requirements, more than cryptocurrency platforms do.
Getting licensed could take years.
“We don’t know for sure whether stablecoins are electronic money,” says Victor Charpiat, an attorney at Kramer Levin Naftalis & Frankel LLP. “This has a major impact on their tax and accounting treatment.”
Charpiat expressed concern that the provision has not been formally clarified by regulators, and since few cryptocurrency firms hold a license under PSD2, firms will lose customers.
“Many digital asset service providers may be violating the law starting next Monday, and there is no way to be sure because there is no clarification,” he said.
EBA regulators said they had called on the industry to prepare “in a timely manner” for MiCA once it became law a year ago, and had provided tools for asking questions.
Whether a platform needs a payment services license for e-money token transactions depends on its activities, the EBA spokesperson said. “They would be authorized on a case-by-case basis.”
Unauthorized Networks
Some cryptocurrency service providers that operate and interact with networks without permission will not be able to comply with PSD2 requirements, said Tommaso Astazi, head of regulatory affairs at trade association Blockchain For Europe.
For example, the law requires payment platforms to safeguard funds received for executing payment transactions.
When users use self-hosted wallets or transfer money on DeFi platforms between different blockchains, companies may not be able to custodian assets as required under PSD2, Astazi said.
Caps on non-euro stablecoins
Issuers of non-euro denominated stablecoins or multi-asset backed stablecoins are subject to a cap.
According to MiCA, these issuers must stick to a volume of 200 million euros per day or one million transactions when the token is used as a “medium of exchange.”
“Imposing volume limitations on US dollar-backed stablecoins could lead to a shift towards euro-backed alternatives, impacting the dynamics of the stablecoin market,” Chaput said.
There are significant exceptions to the thresholds, the EBA clarified in its implementation reports, putting to rest some industry concerns.
They are not counted when the stablecoin is used for trading, as collateral for financial instrument transactions, or used to settle a derivative.
According to the EBA, issuers can also disregard the thresholds if they have “reasonable grounds” to believe that the transaction does not concern the payment for goods or services. relationship.
Local reserves
MiCA requires stablecoin issuers to hold 30% of their cash reserves in EU bank accounts, or 60% for significant e-money tokens.
These reserves must be divided among different local banks to mitigate concentration risk.
“This will be a more immediate blow than the tight limits on the use of dollar-denominated stablecoins within the EU,” Hugo Coelho, head of digital asset regulation at the Cambridge Centre for Alternative Finance, and Mike Ringer, a partner at law firm CMS, said recently. he wrote.
This is a challenge because few banks agree to finance cryptocurrency issuers. And because it is expensive as this means that the funds cannot be used to invest in safe assets.
For Egilsson, this provision undermines the original promise of cryptocurrencies to operate independently of the banking system.
The desirability of cryptocurrencies does not depend on the solvency of the bank, he said DL News in March.
“We can work on it. It’s not a deciding factor,” he said. “But going forward, this is an issue that needs to be addressed.”
Inbar Preiss is a Regulation Correspondent at DL News. Do you have a suggestion? Email her at inbar@dlnews.com.