Until 2024, the European cryptocurrency market operated on the basic legal principle of “Everything that is not expressly prohibited by law is permitted.” It was obvious to market participants that almost everything was permitted, as there were almost no clear general regulatory rules.

The authorities of most countries, on the contrary, believed that cryptocurrencies should fall under the rules of regulation of traditional markets and do not need separate legislation. Remember the famous phrase of Gary Gensler that all crypto assets except BTC are securities?

Free floating diversity

However, as the market has grown, the attitude of some regulators has begun to change. In January 2019, the European Banking Authority (EBA) and the European Financial Markets Authority (ESMA) released a report stating that only a small portion of crypto assets are, by their nature, subject to regulation under financial instruments law. Namely, security tokens.

All other diversity of cryptocurrency market products and legal relations around them were actually in free floating. From that moment on, the development of MiCA began – Regulation (EU) 2023/1114 of the European Parliament and of the Council on the crypto asset market.

Three years later, on May 31, 2023, the pan-European MiCA rulebook was adopted. The main part of MiCA will only come into force on December 30, 2024. The exceptions are two chapters, No. 3 and 4, which came into force on July 30 and concern the regulation of stablecoins.

The difference in the timing of entry into force reflects the EU authorities’ wariness of stable digital coins. Even before the adoption of MiCA and European ParliamentAnd European Bank released reports on the problems of such a class of assets as stablecoins, including: existence within a highly volatile market, unverified level of collateral, unclear issuers. All this together means, according to the European authorities, risks for investors.

Rules for stablecoins

As a result, MiCA included strict regulations that discouraged issuers from launching large numbers of new stablecoins in EU countries.

In addition to the ban on the issuance of algorithmic stablecoins, MiCA has set rather strict rules for the collateralization of this type of asset. According to the rules that came into force, the issuer is obliged, in addition to reserves, to have its own funds as collateral, which must be either at least 350,000 euros, or 2% of the reserve fund, or a quarter of the fixed overhead costs for the previous year, depending on which amount is higher.

The issuer cannot mix its own funds with the crypto asset reserve fund. The fund, in turn, must be secured by at least 30% of the currency to which it is pegged, and the total amount of security 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 of over 5 billion euros. A license for the issuance and circulation of such stablecoins must be obtained directly from the EBA. These stablecoins must be backed by fiat by 60%. 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 cash that companies are required to hold for security. But the fact that, according to the MiCA rules, these funds must be kept exclusively in special licensed institutions, that is, in European banks.

The stablecoin issuer assumes all risks associated with storing deposits in European banks, since it needs to maintain and confirm the availability of sufficient cash in order to pass regular audits.

It is not surprising that this approach has drawn criticism from stablecoin issuers. 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 for work in its country, preferring to deal with cryptocurrency companies in court.

And yet, Circle CEO Jeremy Allaire has publicly expressed
his concerns about the need to store up to 60% of his stablecoin’s collateral in currency in European banks. According to the businessman, this could “seriously destabilize the industry” because banks, unlike stablecoin operators, have access to credit. Any bank deposit always carries credit and counterparty risks – something that a stablecoin operator cannot afford.

Ultimately, the current MiCA rules on stablecoins have allowed foreign companies to use funds to support the work of European banks, while preventing the company from participating in the region’s monetary policy, explaining
protecting investors and combating money laundering.

Yes, these are clear, understandable rules of conduct that apply to all EU countries and should be implemented into the national legislation of these countries by 2026. But the only advantage the EU has is that MiCA appeared earlier than the others.