The authorities of most countries, on the contrary, believed that cryptocurrencies should be subject to the rules of regulation of traditional markets and do not need separate legislation. Do you remember Gary Gensler's famous phrase that all cryptocurrency assets except BTC are securities?
Free-floating variety
However, with the growth of the market, the attitude of some regulators began to change. In January 2019, the European Banking Supervision Authority (EBA) and the European Financial Markets Authority (ESMA) released a report stating that only a small part of cryptocurrency assets by their nature fall under the regulation of legislation on financial instruments. Namely, security tokens.
The rest of the variety of products of the cryptocurrency market and the legal relations around them were actually floating freely. From that moment, the development of MiCA Regulation (EU) 2023/1114 of the European Parliament and of the Council on the crypto assets market began.
Three years later, on May 31, 2023, the pan-European MiCA rulebook was adopted. The main part of the MiCA will come into force only on December 30, 2024. The exceptions are two chapters, Nos.3 and 4, they entered into force on July 30 and relate to the regulation of stablecoins.
The difference in the timing of entry into force reflects the cautious attitude of the EU authorities towards stable digital coins. Even before the adoption of MiCA, both the European Parliament and the European Bank issued reports on the problems of such an asset class as stablecoins, among which they named: existence within a highly volatile market, an untested level of collateral, incomprehensible issuers. All this together means, according to the European authorities, risks for investors.
Rules for Stablecoins
As a result, strict regulation was prescribed in MiCA, which does not encourage issuers to launch a large number of new stablecoins on the territory of EU countries.
In addition to the ban on the release of algorithmic stablecoins, MiCA has established rather heavy rules for securing this type of asset. According to the rules that have entered into force, the issuer is obliged, in addition to reserves, to have its own funds in collateral, which must be either at least 350,000 euros, or 2% of the funds of the reserve fund, or a quarter of the fixed overhead costs for the previous year, depending on which amount is greater.
The issuer cannot mix its own funds with the reserve fund of the crypto asset. The fund, in turn, must be backed by at least 30% of the currency to which it is linked, and the total amount of collateral must correspond to the amount of stablecoins in circulation.
The law also introduces the concept of "significant stablecoins", which include projects with a market capitalization above 5 billion euros. A license for the issuance and circulation of such stablecoins must be obtained directly from the EBA. These stablecoins should be backed by fiat by 60% already. Thus, no European stablecoin can be 100% backed by securities with yield.
Clear rules, but
But the main problem is not even the amount of cache that companies are required to keep to ensure. And the fact is that, according to MiCA's rules, these funds should be stored exclusively in special licensed institutions, that is, in European banks.
The issuer of the stablecoin assumes all the risks associated with storing deposits in European banks, since in order to undergo regular audits it needs to maintain and confirm the availability of sufficient cash.
It is not surprising that this approach has attracted criticism from issuers of stablecoins. For example, the American company Circle has already received an EMI license to issue stable digital coins in the EU. This was done in defiance of the American regulator, which does not introduce clear rules of operation in its country, preferring to deal with cryptocurrency companies in the courts.
Nevertheless, Circle CEO Jeremy Ellyre has publicly expressed his concerns about the need to store up to 60% of his stablecoin's collateral in foreign currency in European banks. According to the businessman, this can "seriously destabilize the industry", since banks, unlike stablecoin operators, have access to loans. Any bank deposit always carries credit and counterparty risks, something that a stablecoin operator cannot afford.
As a result, the current MiCA rules regarding stablecoins allowed the use of funds from foreign companies to support the work of European banks. And at the same time, to prevent the company from participating in the monetary policy of the region, explaining the protection of investors and the fight against the laundering of funds obtained illegally.
Yes, these are clear and understandable rules of business, which apply to all EU countries and should be implemented into the national legislation of these countries by 2026. But the advantage of the EU is only that MiCA appeared before the rest.