MiCA was introduced in Sep. 2020 by the European Commission as part of the larger Digital Finance strategy. MiCA generally relates to crypto assets that are described as digital demonstrations of value or rights, which may be transmitted and stored electronically, by use of distributed ledger technology or akin technology.
MiCA has released a framework of which 26 of its 168 pages are devoted to a subcategory titled “asset-referenced tokens”. These are a kind of stablecoin backed by a basket of diverse fiat currencies, commodities, or crypto asset. This description references the original vision of Libra, Facebook’s proposed digital currency that elicited a global government criticism back in 2019. After this reaction, the project was renamed diem, and was planned to be backed by a single currency.
The MiCA Proposal Highlight On Stablecoins
According to Hansen, current lead of strategy and growth at Unstoppable Finance, close to a third of the entire proposal is discussing stablecoins and e-money tokens. He also claimed that the MiCA guidelines for stablecoin issuers might be mostly harsh.
The document states that it plans to manage stablecoin issuance in the EU, which is shown by the fact that two classifications of crypto assets covered by the framework are varying kinds of crypto. MiCA provides standard requirements for potential as well as established stablecoin issuers. For example, it is required that all stablecoin issuers should possess and conserve capital funds equal to either €350,000 or 2% of their total reserve, whichever is the larger sum.
However, since not all stablecoin issuers are equal, the framework also sets out further requirements for what it groups as ‘significant’ issuers. This is any issuer that exceeds a number of thresholds, including a market capitalization of at least €1 billion, and records at least 500,000 transactions per day.
The significant stablecoin issuers such as USDC and USDT, have other added requirements to fulfil under MiCA such as maintaining capital funds equivalent to 3% of their reserve assets.
MiCA sort of agrees with Hansen’s claims that the rules assigned to significant stablecoin issuers are harsh. According to the framework, the restrictions could possibly be warranted assuming the risks to financial stability, monetary policy and sovereignty. However, it warns against this route because it would be inconsistent with the goals set at EU level to endorse innovation in the financial sector.
The Future of the MiCA Framework
The stablecoin space has grown tremendously in the recent past and therefore, it is unlikely that the framework will have a lot of changes in its approach to regulating the currencies. Top stablecoins have come under scrutiny in the past, and it is expected the same will continue in the future. For instance, USDC issuer, Circle, was subpoenaed by the U.S. Securities and Exchange Commission in September as part of an ongoing inquiry.
Hansen pointed out that 26 out of the 30 trading pairs with the highest trading volumes on Binance include a stablecoin. Therefore, the heavy restrictions on these assets from bodies like MiCA could damage EU competitiveness. However, Erhold, regulatory specialist at Bitpanda assumes that the benefit of clear rules would outplay immediate worries over stablecoins.
It is however unclear whether MiCA will come into effect before the end of 2023. In the meantime, therefore, everybody can make their own law. Although 2 years is a short period for politics and laws, it is a decade for the fintech space. Stablecoin issuers can keep the same system, talk to all regulators and get licences individually in all locations.
The aim of financial bodies such as MiCA is to create frameworks to guide their members on all matters. The current rules on crypto seem to be focused on stablecoins, and there is no proof that the framework will change in future in its approach to regulating these currencies. Although the legal certainty created by these regulations will likely attract institutional investment, overregulation could hinder innovation and limit entrepreneurs.