Stablecoins: 15 days before MiCA comes into force, the situation remains unclear

With just 15 days to go before MiCA regulations for stablecoins come into force, there is some concern in the industry. Many stablecoin issuers say they are unlikely to be ready by 30 June, when the new regulations come into force.

According to our information, the delay is due both to compliance with certain rules, such as obtaining an e-money establishment licence, and uncertainty about other aspects.

"The regulators are not in agreement with each other on certain points, in particular whether stablecoins should be considered as a means of trading or payment", explains a lawyer who advises several players in the sector. "Yet these issues have an impact," he adds.

Here's a roundup of the areas of concern.

A strict delisting of unregulated stablecoins on 30 June next year?

To operate in a regulated manner in Europe, stablecoin issuers will have to obtain the Electronic Money Establishment (EME) licence before 30 June next.

As a result, exchange platforms will have to delist stablecoins for their European users who have not obtained this approval before the deadline.

At this level, approaches vary:

OKX have, for example, announced that they will delist USDT, the stablecoin issued by Tether and the market leader ($115 billion in circulation), whose boss Paolo Ardoino has announced that it will not comply with regulations in time.

Others such as Kraken and Crypto.com have not yet decided to take the plunge. For its part, Binance will initially restrict access to unregulated stablecoins on 30 June, citing in particular the USDT and FDUSD issued by Hong Kong-based First Digital, which since last August has replaced its BUSD, discontinued by the New York regulator in February 2023.

The issue is all the more thorny given that, according to our information, even electronic money institution (EME) dossiers involving giants of the sector such as SG-Forge, the Société Générale Group subsidiary issuing CoinVertible (EURCV), or Circle, issuer of USDC and EURC, have been slowed down or even virtually halted for several months due to the lack of clarification provided by regulators at European level.

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The sensitive issue of reserves for issuers

To comply with MiCA, stablecoin issuers must respect constraints regarding the management of their reserves. This was the main issue put forward by the head of Tether to justify his decision not to comply with MiCA on 30 June.

For "significant size" issuers, i.e. those whose issuance exceeds €5 billion, 60% of their reserves will have to consist of cash deposits with several banking players. For smaller stablecoins, this amount is set at 30%.

"Depositing funds with a banking player also exposes stablecoins to the risk of bankruptcy. Look at what happened in the United States with Silicon Valley Bank," explained Paolo Ardoino in an interview with The Big Whale at Paris Blockchain Week.

These rules will directly impact the stablecoin business model, which is based on investing their reserves in US Treasury bonds. They will also have more constraints on how they manage their balance sheets.

"In 2022, we had to repay nearly $7 billion in less than 48 hours. In one month, the amount of these repayments reached 20 billion dollars, or a quarter of our reserves. This would have been almost impossible to achieve so quickly if we had a quota of deposits tied up in the bank", lamented Paolo Ardoino.

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Although Circle has not made the same strategic choice as Tether by complying with the regulations, its director of strategy in Europe, Patrick Hansen, explained in a research article published in January that these requirements could harm Europe's competitiveness.

"For international stablecoin issuers, non-European jurisdictions without a similar framework, or jurisdictions with a more flexible, discretionary and conservative set of indicators and thresholds, could prove much more attractive from an oversight perspective," he noted.

Another sticking point: the impossibility for issuers to remunerate holders of their stablecoin since MiCA treats them as electronic money. Even though Circle and Tether do not currently share the interest generated by their reserves with their users, stablecoins regulated in Europe could ultimately be at a disadvantage compared with decentralised solutions.

Exchange platforms may need a new licence

MiCA considers stablecoins denominated in dollars or euros to be e-money and not digital assets, unlike other cryptocurrencies.

As a result, exchange platforms or companies wishing to offer services including stablecoins could be subject to the Payment Services Directive (PSD2). In addition to MiCA authorisation, they could therefore be required to obtain new licences.

On this point, some players have been calling for clarification for several months as to when a stablecoin could be considered a means of payment.

Contacted by The Big Whale, the European Banking Authority (EBA) clarified that it did not consider the basic services provided by exchange platforms to be payment services. These services include trading, custody and the purchase of cash. For these activities, platforms will therefore not need a payment service provider (PSP) licence on 30 June.

However, things could change in the coming months due to legislation currently being negotiated such as PSD3, which could overlap. "MiCA is a step-by-step regulation. There will necessarily be adjustments to be made", reassures a European official.

The term "decentralised" still not specified

To stand out, some players are betting on decentralisation in order to take advantage of a grey area not yet covered by European regulation, as decentralised finance (DeFi) does not fall within the scope of MiCA.

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.

Among them are Usual's usUSD, the stablecoin project championed by former French "crypto" MP Pierre Person, or the agEUR issued by the Angle protocol, as well as Maker's Dai.

However, for the moment, no details have been provided by the European authorities to clearly determine what level of decentralisation is required for a stablecoin to benefit from the "DeFi exemption". Nor has it been specified whether exchange platforms will have to stop offering such stablecoins to their European users on 30 June or in the coming months.

"All these uncertainties are forcing players to prepare well in advance and will mechanically lead to a drastic rationalisation of the sector in the coming months. This is not necessarily frowned upon by regulators, who will have fewer fanciful players to deal with", ironises one industry insider.

Although European officials have prided themselves on having been the first to adopt a specific framework for cryptos at global level, there will be plenty of regulatory challenges in the months ahead. And Europe's credibility on this subject will largely depend on how they are managed.

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