Stablecoins in Europe and EUR now we have MiCA

The EU has some new regulations for things crypto aka digital assets. Some parts of that come into force now and others from Jan 1 2025. Stablecoins are covered. My aim here is to share the when, the what, the why and the so-what of the EU's 'Markets in Crypto Assets' regulation.

 

When

Two parts, Titles III and IV, came into effect in June 2024. Titles I, II, V, VI and VII will be effective December 2024. Title II refers to Asset Referenced Tokens (ARTs) and IV to E-Money Tokens. A rule of thumb is that a new digital asset referencing just one currency is E-Money, anything referencing a basket of assets or currencies is an ART.

What

Essentially, MiCA sets out some quantitative hurdles for making Stablecoin issuers in the EU subject to EBA (European Banking Authority) oversight. Those hurdles cover both volume and value of activity; more than 10 million holders, more than EUR 5B in issuance, as well as some metrics on average activity. There are also some subjective tests which can be applied to deem a particular coin systemic and thus subject to EBA oversight; the issuer is deemed a core provider, there is significant international scale, an ART is deemed inter-connected with the financial system. Simply put, those tests are a low bar. It is easy to fall under EBA oversight.

The regulation has some prescriptive guidance on exactly how the reserves which a Stablecoin issuer has must be invested and managed. Essentially, it is all about risk management and customer / investor protection. A simple way of putting it might be: "Silicon Valley Bank, SVB, was all about a bank getting it wrong. MiCA is simply laying out a rule set to avoid similar errors by issuers of Stablecoins".

Why

As soon as you are talking money and a means of payment, central bankers and regulators have an interest. When there is a new something which is money-like, they all start by asking the same question: "who has a claim on what?" The answer to that informs their view of the perceived potential impact on fiscal stability and monetary policy, both of which are core responsibilities for central banks the world over.

There are two drivers of their interest:

1) The first, a more general one, is that disruption in the financial markets can have a negative impact on fiscal stability. The textbook case of this is the October 2022 disruption in the UK Gilts markets caused by pension funds having to sell off assets to meet margin calls. "If something in financial services is big enough that if a sudden event happens, our local markets will be disrupted" is a very fair reason for a central bank or national regulator to be interested. Size, as we know, does matter.

2) The other driver of central bank interest was when Facebook (now Meta) announced their Libra project (later Diem and even later cancelled). The original approach was a multi-currency one; Libra would accept or on-ramp any currency, then run a central Treasury investing the assets and then offer a payout, or off-ramping in any currency. The second version, before the project was cancelled, was simply to deal with USD.

In the Libra case, the collective of central bankers got spooked: "this could be really big" followed by "how do we regulate something which could impact multiple currencies and markets?" One concern would be sheer market size (see box for some projected metrics). That is a concern because of something the finance types call "concentration risk"; customers deposit money, Libra needs to invest and then hoovers up all the short-term debt it can throw a stick, or rather a FIX order, at. No room for others. The next risk is on things cross-border, or rather cross-currency. If a sell or off-ramp order comes in, there would easily be a situation where Libra would have needed to do spot FX trades in size. Fiscal stability and monetary policy angst all over the place and no easy answer in the Economics text books all these banker types read; Samuelson version 2 or 20.

So what?

Serious players have already registered as EMT, Electronic Money Token, issuers or will. Circle has led the way, obtaining licenses for both USDC and EURC. Deutsche Bank is going down the same path with its AllUnity offering.

To date, Stablecoin activity has been overwhelmingly USD centric. My simple explanation is that the likes of USDT (Tether) and USDC (Circle) have been used as temporary stores of value when investors step out from actively trading crypto; it is like coming off an ice hockey rink and being able to keep your skates on so you can go back out easily. If you had to defund to fiat, it would be like taking your skates off; if you had to put them back on, the action would be over before you were ready.

The real value of stablecoins is their ability to inter-operate with digital assets and enable programmability and composability to come into play; execute transfer X if Y is true, combine code elements developed on the Ethereum network. This is all the stuff of tomorrow.

Here is how I would think about Stablecoins in the MiCA context:

If you are going to hold balances in Stablecoins, then at a minimum make sure you know where are you holding them and what risks you are taking. One is the risk of the issuer, the other is the risk of your custodian. Assume that your holdings are not protected if the custodian defaults, but go and ask the question. On the issuer side; is the issuer regulated or not and where? Can you answer the question: "If there is an issue with the issuer and or the custodian, which judge do I go to see?"

Now as a rule, Stablecoins do not pay interest and those regulated under MiCA certainly can't. So, "same rules apply" as in the fiat world. Don't hold too large a balance and use money market funds. These too are now available in tokenised form – see box below. If you intend to be active in digital asset and crypto markets, do the homework to determine how you can use money market funds and readily sell vs. a Stablecoin to drive your investment activity.

If, like DWS, you are in the asset management business, somebody in your strategy or business development team should be asking: "Now that there are tokenised assets and tokenised means of payment, what should we be doing?"

Thanks for reading. Please do let me know what you think of these notes. Feedback via the comments would be great.

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Author

Olaf Ransome is a liquidity and financial services expert. He is the founder of 3C Advisory  You can message Olaf directly here.