MiCA: Tensions over stablecoins

Which stablecoins will remain authorised in Europe at the start of the summer? This burning question is currently preoccupying the crypto industry, with no clear answer even for European regulators, who are also navigating in a blur. "There are still very many question marks," representatives of the European Banking Authority (EBA) and the European Securities and Markets Authority admit to The Big Whale.

With the approach of the application of the European MiCA regulation, designed to regulate crypto-assets at EU level from 30 December 2024, and its component on stablecoins effective from 30 June 2024, the sector is at a turning point.

This regulation promises to transform the market by imposing significant restrictions on stablecoin issuers (whether they represent euros or dollars), potentially restricting European users' access to major stablecoins, whether centralised or decentralised, on regulated exchange platforms in Europe. "Very few people are aware of this, both in the crypto ecosystem and at regulatory level," laments Morgane Fournel-Reicher, a lawyer at Herbert Smith.

"The major consequence will be to encourage retail investors towards decentralised finance (DeFi) to buy and use stablecoins, and to store them in self-hosted wallets like those designed by Ledger," adds Sébastien Dérivaux, contributor to the MakerDAO ecosystem and CEO of Steakhouse Financial.

Even though these actions are tending to become more and more accessible, they are not simple for beginners and the latter are thus exposing themselves to mistakes. And therefore to capital losses.

A problematic classification as electronic money

According to the forthcoming definition in MiCA, stablecoins will be classified as electronic money (E-Money Token), and not as digital assets like other cryptocurrencies, whether in dollars or euros.

"This assimilation to e-money is intended to provide better protection for holders, allowing them to claim repayment at any time at parity," points out Morgane Fournel-Reicher.

However, e-money is designed to operate in a closed network, under the total control of its issuer, in contrast to stablecoins, which operate on an open network, such as a public blockchain like Ethereum.

"This means that the issuer of a stablecoin has to constantly verify the identity of its holders, which is virtually impossible in the crypto universe," continues Morgane Fournel-Reicher.

In addition, electronic money imposes annual usage limits of a few thousand euros for individuals, a restriction unsuitable for stablecoins because stablecoins are instruments at the heart of investment strategies and record large volumes.

According to our information, French regulators may finally be flexible on the issues of identification and limits. However, no official confirmation has been given to date.

Another unresolved question concerns the remuneration of user deposits, a pillar of the stablecoin business model based on investing their reserve in low-risk assets (most often in sovereign bonds, currently remunerated at 5.5% per annum on US securities).

"Stablecoin issuers would like to redistribute part of this return to holders. Banning this mechanism would severely damage their attractiveness," points out Marina Markezic, co-founder of The European Crypto Initiative, one of Europe's largest crypto lobbies.

As a reminder, the majority of traditional electronic money issuers also earn a return on this principle but do not have the option of passing it on to their users.

Traditional banks at an advantage over crypto players

For many players, it will be difficult to obtain these licences, which are necessary to maintain their business in Europe. By 30 June 2024, only electronic money institutions (EMEs) and credit institutions (banks) will be allowed to do so.

"With MiCA, we will see an increase in stablecoins issued by banks," anticipates Sveinn Valfells, co-founder and CEO of Monerium, the only native player in the crypto ecosystem to have EME approval. The Icelandic company manages the issuance of EURe, the outstanding supply of which is around €10 million.

For Matthieu Lucchesi, a lawyer with the law firm Gide, "traditional banking players have a wide avenue to be able to launch a regulated stablecoin of significant scale in Europe”. Particularly as the European authorities say that "many banking players" have positioned themselves on the subject by taking "the necessary regulatory steps" to fit into the MiCA rules on stablecoins.

"Many crypto players have also positioned themselves, but they are much less well prepared", confides a Brussels lobbyist. "Apart from Circle (which has PSAN registration in France but is still waiting for its EME licence), very few native players in the ecosystem seem to be taking the measure of what can potentially fall on them."

The question remains whether the authorities will grant an extension to non-compliant players between now and 30 June. In its role, the EBA considers this hypothesis "highly unlikely," although, according to our information, behind-the-scenes discussions suggest otherwise.

Exchanges may need new licences

The subject of stablecoins goes beyond issuers and could affect the exchange platforms that list them. Indeed, assimilation to electronic money could subject crypto exchanges to the Payment Services Directive (PSD3), requiring platforms such as Coinbase or Binance to obtain additional authorisation.

For lawyer Morgane Fournel-Reicher, the issue is thorny because it has yet to be defined in what cases a stablecoin could be considered a means of payment. "For the moment, no clarification has yet been made on this subject", she stresses.

And time is of the essence: "Today, exchange platforms are the main gateway for new investors into the crypto ecosystem. Preventing them from listing stablecoins would considerably slow down the democratisation of crypto in Europe", laments a good observer of the sector.

Towards limited or decentralised solutions?

In the face of regulatory complexity, some players are already considering offering stablecoins that would evolve in a limited network, i.e. in which users would be pre-authorised by the issuers. This is notably the case with Société Générale's CoinVertible, which can only be acquired on Bitstamp and cannot be withdrawn from the platform. Many banking players believe that such a product could be excluded from the scope of MiCA.

Others, meanwhile, are betting on decentralisation in order to take advantage of a grey area not yet covered by European regulation. These include the agEUR issued by the Angle protocol, Maker's Dai and the usUSD from Usual, the stablecoin project spearheaded by former French "crypto" MP Pierre Person.

Unlike stablecoins issued by companies, these are based on protocols. They would escape any regulation in 2024, even if this is only temporary as the new version of MiCA expected in 2025-2026 should take an interest in them.

According to our information, the Electronic Money Association (EMA), which represents the sector in Europe, is working on drafting an open letter with associations such as Adan or the EUCI to the European authorities to demand clarification and denounce the unequal treatment between traditional players and those emanating from the crypto industry.

"Initially intended to protect consumers, the qualification of stablecoins as electronic money in MiCA ultimately brings more uncertainty than anything else," regrets Marina Markezic.