The EU MiCA Regulation: Implications for Stablecoins

INTRODUCTION

Digital advancements over the past decade have fuelled the rise and rapid growth of cryptocurrencies, reshaping the payments industry. Cryptocurrencies are often associated with speculative investment, and as a result, efforts have been made to control market fluctuations. One solution to this has been the introduction of stablecoins. However, as the world of crypto and digital assets continues to grow, there is a pressing need for regulatory frameworks to ensure market transparency and investor confidence. In response to the increasing complexity of the crypto market, including the introduction of stablecoins, the EU has adopted the Regulation on Markets in Crypto-Assets (MiCA), with rules regarding stablecoins in effect since 30 June 2024.

DEFINITION OF STABLECOINS

Stablecoins are cryptocurrencies designed to maintain a stable value by being backed by a specific asset, a group of assets, or an official currency. There are three primary mechanisms through which stablecoins seek to maintain their value stability;

1. Legal Assets: Stablecoins are backed by legal assets such as fiat currency (e.g. euros), commodities, or government securities. The issuer guarantees the value of the stablecoin by providing full collateral and agreeing to redeem it at par value in the fiat currency it was purchased in. Issuers of fiat-collaterised stablecoins, such as Tether (USDT), hold reserves with independent custodians, who conduct regular audits to ensure the reserves align with the issued coins. The amount of currency held in reserve is equivalent to the value of coins issued, typically at a ratio of 1:1.

Similarly, issuers of commodity-backed stablecoins, such as Tether Gold (XAUt), hold reserves with independent custodians in secure, audited facilities or invest in financial instruments linked to the commodities. These coins are backed by commodities like gold, silver and oil, with each coin representing ownership of a designated amount of the underlying commodity.

2. Crypto-assets: Stablecoins backed by crypto-assets are subject to greater volatility due to the rapid fluctuations in the value of cryptocurrencies. To mitigate this risk, issuers maintain a higher reserve ratio, often 2:1 or greater, ensuring that the value of crypto-assets held in reserve exceeds the value of the issued stablecoins. For example, the Sky Protocol’s stablecoin is programmed to represent 1 U.S. dollar but is backed by multiple cryptocurrencies and real-world assets, with the total value of these assets typically being 155% of the value of the stablecoin in circulation.
3. Algorithms: Algorithmic stablecoins, such as Ampleforth, use smart contracts, which are computer programs that automatically adjust and control the supply of stablecoins, ensuring their value remains close to the target value, for example $1. When the stablecoin’s price rises above its target value, the algorithm increases the total supply of tokens in circulation, which brings the price back down to the target value. Conversely, when the price falls below the target value, the algorithm reduces the supply of tokens, which pushes the price back up to the target value. Essentially, these stablecoins do not rely on physical assets like fiat currency or commodities backing, but instead use supply adjustments to maintain a stable value. Under MiCA, tokens that rely exclusively on algorithmic stabilisation without asset backing do not fall within the regulatory categories applicable to stablecoins in the EU.

TYPES OF STABLECOINS

Under MiCA, stablecoins may fall into one of the following two classifications;

Asset-Referenced Tokens (ARTs): “means a type of crypto-asset that is not an electronic money token and that purports to maintain a stable value by referencing another value or right or a combination thereof, including one or more official currencies.”

Electronic-Money Tokens (EMTs): “means a type of crypto-asset that purports to maintain a stable value by referencing the value of one official currency.”

KEY REGULATORY REQUIREMENTS FOR STABLECOINS

Issuers of stablecoins will have to comply with the following requirements;

Issuers of ARTs

• EU Establishment and Authorisation

Issuers must be a legal person based in the EU and authorised by their home EU Member State or be a licensed credit institution.

• White Paper Issuance

Issuers must publish a crypto-asset White Paper that requires prior approval by the competent national authority. It must be accurate, as any inaccuracies may result in liability.

• Token Redemption

Issuers must redeem ARTs upon the holder’s request, either at market value or by delivering the referenced assets.

• Ethical Conduct and Fair Communication

Issuers must act with honesty, fairness, and professionalism, ensuring communication with token holders is fair, clear, and non-misleading while prioritising the best interests of the token holders.

• Complaint Handling and Conflict of Interest

Issuers must have effective and transparent procedures to address complaints promptly, fairly, and consistently, while also identifying, preventing, disclosing and managing any conflicts of interest.

• Reserve Assets and Recovery and Redemption Plans

Issuers must maintain reserves of assets to cover liabilities to token holders and ensure their own funds are at least equal to the higher of  €350 000, 2% of average reserves, or a quarter of last year’s overheads. Recovery and redemption plans must also be in place for situations where obligations cannot be met.

Issuers of EMTs

• Authorisation and Licensing

Issuers must be authorised as either a credit institution or an electronic money institution.

• White Paper Issuance

Issuers must draw up and publish a crypto-asset White Paper and notify the competent national authority thereof. Unlike ARTs, prior approval is not required.

• Token Issuance and Redemption

Tokens must be issued at par value upon receipt of funds and redeemed at par value upon the holder’s request. MiCA also strictly prohibits issuers from granting interest to holders of EMTs.

• Investment of Funds

Funds received from token issuance must be safeguarded, with at least 30% held as deposits in separate accounts at credit institutions and the remainder invested in secure, low-risk and highly liquid instruments denominated in the same currency.

• Recovery and Redemption Plans

Recovery and redemption plans must also be in place for situations where obligations cannot be met.

SIGNIFICANT STABLECOINS

Significant ARTs and EMTs are subject to enhanced regulatory oversight under MiCA. The European Banking Authority (EBA) designates these tokens as ‘significant’ based on specific criteria, such as the number of holders, market impact as well as the transaction volume, and will subsequently assume supervisory responsibilities in accordance with the framework set out in MiCA. Issuers of significant tokens must comply with stricter obligations, including adopting sound risk management policies, implementing liquidity management policies, ensuring diverse custody options, and conducting regular stress testing.

CONCLUSION

The challenges faced by past stablecoin projects underscore the need for the adoption of MiCA, which aims to ensure market stability, protect investors, and advance innovation. The introduction of MiCA marks a significant milestone in establishing a comprehensive regulatory framework for stablecoins within the EU.  Stablecoins act as a gateway between traditional finance and the cryptocurrency sector, enhancing transaction speed, reducing costs, and providing greater stability. They also drive growth in cross-border payments, e-commerce, remittances and decentralised finance.