Regulation of Stablecoins under MiCA: Changes in the European Crypto Market

Until 2024, the European cryptocurrency market operated on the principle "everything that is not explicitly prohibited by law is allowed." Market participants enjoyed a high degree of freedom due to the lack of clear regulatory rules. Authorities in most countries believed that cryptocurrencies should adhere to traditional market regulations and did not require separate legislation. For example, Gary Gensler once stated that all cryptocurrency assets, except BTC, are securities.

However, as the market grew, some regulators began to change their stance. In January 2019, the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) released a report stating that only a small portion of cryptocurrency assets naturally fell under the regulation of financial instruments law, particularly security tokens. The rest of the crypto market products and the relationships around them remained largely unregulated. This marked the beginning of the development of MiCA, the Regulation (EU) 2023/1114 of the European Parliament and Council on the market in crypto-assets.

Three years later, on May 31, 2023, the pan-European MiCA rulebook was adopted. The main provisions of MiCA will come into effect on December 30, 2024, except for two chapters (Nos. 3 and 4), which came into effect on July 30 and concern the regulation of stablecoins.

The different implementation dates reflect the cautious attitude of EU authorities towards stablecoins. Even before MiCA was adopted, the European Parliament and the European Central Bank had published reports on the issues associated with stablecoins, such as high market volatility, insufficient backing, and unclear issuers. According to European authorities, these factors pose risks to investors.

MiCA introduces strict rules for stablecoin issuers, discouraging the launch of many new stablecoins in EU countries. In addition to banning the issuance of algorithmic stablecoins, MiCA sets stringent requirements for their backing. Issuers must have their own funds amounting to at least €350,000, 2% of the reserve fund, or a quarter of the fixed overhead costs from the previous year, whichever amount is greater.

These funds cannot be mixed with the reserve fund of the crypto asset. The reserve fund must be backed by at least 30% of the currency to which the stablecoin is pegged, and the total backing must correspond to the number of stablecoins in circulation. The law also introduces the concept of "significant stablecoins" with a market capitalization above €5 billion. To issue such stablecoins, a license from the EBA is required, and they must be backed by fiat currency by 60%. Thus, no European stablecoin can be 100% backed by income-yielding securities.

The main issue is not just the amount of cash companies are required to hold but also that these funds must be stored in licensed institutions, i.e., European banks. Stablecoin issuers bear all the risks associated with holding funds in European banks and must confirm the presence of sufficient cash reserves for regular audits. This has drawn criticism from stablecoin issuers. For instance, the American company Circle obtained an EMI license to issue stablecoins in the EU, but Circle's CEO Jeremy Allaire expressed concerns about storing 60% of the stablecoin's backing in European banks, considering it potentially destabilizing for the industry. Banks have access to credit, which creates additional risks for stablecoin operators who cannot afford these risks.

In the end, MiCA's rules allow foreign companies' funds to support European banks while limiting their participation in the region's monetary policy. This is explained by the need to protect investors and combat money laundering. These clear rules apply to all EU countries and must be implemented into national laws by 2026. The EU's advantage is that MiCA appeared earlier than other similar regulations.