MiCA Clarifies Compliance Requirements for USDT and Other Stablecoins in the European Union
The European Union (EU) has been at the forefront of cryptocurrency asset regulation, and its Cryptocurrency Market Regulation Act (MiCA), passed in October of last year, aims to establish a unified regulatory framework for cryptocurrencies within the union. Stablecoins are cryptocurrencies anchored to fiat currency or other assets, designed to reduce price volatility, enhance payment efficiency, and promote financial inclusion. Because stablecoins are linked to sovereign currencies, they have significant implications for financial stability and tax policies, making stablecoin regulation an increasingly important part of international cryptocurrency asset regulation. This article takes USDT stablecoin as an example to analyze the regulatory requirements for stablecoins outlined in the MiCA act, their impact on USDT and its issuers, and the measures taken in response, providing insights for other countries and regions in formulating relevant regulations.
1.MiCA: The EU’s Cryptocurrency Enters the Era of Unified Regulation
1.1 MiCA Compared to the Previous Regulatory Framework
MiCA is a regulatory framework proposed by the EU in September 2020, along with the Digital Operational Resilience Act (DORA) and the European Digital Finance Strategy (EDFS). These acts collectively form the EU Digital Finance Strategy, aiming to build a secure, innovative, and inclusive digital financial market. MiCA is also the EU’s first comprehensive regulatory framework for cryptocurrencies, covering aspects such as cryptocurrency issuance, trading, and service provision, with the goal of establishing unified and transparent cryptocurrency regulatory standards and requirements within the union.
Compared to previous regulatory schemes, MiCA extends its coverage to unofficial cryptocurrencies, including frequently mentioned stablecoins and utility tokens, whereas the EU’s previous regulatory framework only covered cryptocurrencies with financial instrument attributes. MiCA classifies cryptocurrencies based on whether they are anchored to other assets to determine their value, with the aim of distinguishing the risks and challenges faced by different types of cryptocurrencies and formulating corresponding regulatory requirements:
- Electronic Money Tokens: Cryptocurrencies pegged to a single fiat currency, intended as electronic substitutes for cash, usable for payments or transfers. For example, cryptocurrencies pegged to the Euro fall into this category.
- Asset-Referenced Tokens: Cryptocurrencies pegged to multiple fiat currencies or other assets, with the goal of maintaining a stable value.
- Other Cryptocurrencies (Crypto-assets, other than Asset-Referenced Tokens or E-Money Tokens): Cryptocurrencies not falling into the first two categories, including most cryptocurrencies and utility tokens. Bitcoin, Ethereum, and others belong to this category.
From MiCA’s classification of cryptocurrencies, it is evident that its regulatory focus is on electronic money tokens and asset-referenced tokens, rather than other cryptocurrencies. Therefore, MiCA clarifies that cryptocurrencies falling under the scope of existing EU financial regulations, such as securities tokens, are not subject to MiCA regulation.
Additionally, MiCA imposes stricter requirements on cryptocurrency issuers and service providers, including licensing, reserve funds, information disclosure, and governance structure. In contrast, the previous EU regulatory framework (EU Anti-Money Laundering Directive, 5AMLD) had only basic rules related to anti-money laundering and consumer protection. Furthermore, as a mandatory EU law, MiCA grants EU-level regulatory agencies a range of supervisory and enforcement powers, such as allowing the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) to regulate issuers and service providers of key asset-referenced tokens and key electronic money tokens. Regulatory measures include approval, suspension, or revocation of their licenses and regular inspections. Readers interested in more details and the history of the MiCA framework can refer to TaxDAO’s previous publications “The EU’s Cryptocurrency Regulation Enters the Era of Unity: A Historical Review and Future Outlook” and “Interpreting and Comparing the EU Cryptocurrency Market Regulation Act (MiCA).”
1.2 MiCA’s Regulatory Requirements for Stablecoins
MiCA’s regulatory approach for two types of stablecoins is quite similar, with specific differences in detailed provisions. In general, its regulatory requirements can be summarized in several key aspects.
Firstly, presence and authorization within the EU. MiCA mandates that cryptocurrency service providers must establish a physical presence within the EU and have at least one director residing in the EU. The term “place of effective management” refers to the location where crucial management and business decisions are made. All entities offering stablecoin services within the EU must secure EU authorization and comply with the EU’s standardized regulatory rules. These rules encompass capital requirements, governance structures, risk management, information disclosure, customer protection, anti-money laundering, and counter-terrorism financing. If stablecoins are categorized as significant asset-referenced tokens or electronic money tokens, additional regulatory measures apply.
Secondly, issuance regulation. All entities issuing or providing stablecoins must publish a whitepaper within the EU and report to relevant competent authorities. MiCA outlines specific information requirements and risk disclosures for stablecoin whitepapers. Furthermore, MiCA regulates the issuance and marketing processes of stablecoins to mitigate the risk of financial fraud.
Thirdly, reporting obligations. For asset-referenced tokens with a total issuance value exceeding €100 million, MiCA imposes stringent reporting obligations. These requirements compel virtual asset service providers (VASPs) to report on various metrics, including the number of holders, the value of issued asset-referenced tokens, the scale of asset reserves, the average daily transaction volume, and the average total value on a quarterly basis. Additionally, VASPs must report the estimated average daily trading volume and average total value of the stablecoin used as a primary medium of exchange within the currency area during the relevant quarter.
Fourthly, liquidity reserve requirement. MiCA mandates that token issuers establish sufficient liquidity reserves to safeguard consumers. For asset-referenced token issuers, this entails maintaining a minimum deposit in each fiat currency, amounting to no less than 30% of the reference amount published by the EBA. Token holders also retain the right to redeem their tokens permanently. Rules governing the operation of reserve funds must ensure adequate minimum liquidity. The European Banking Authority (EBA) will oversee the regulation of all stablecoins.
Lastly, scale limitations. MiCA specifies that non-Euro-supported asset-referenced tokens should not exceed one million transactions and €200 million in daily trading volume. If the average daily transaction volume and average total value, as estimated in the second aspect, surpass these thresholds, MiCA requires issuers to cease the issuance of the stablecoin and submit improvement plans. These plans are designed to ensure that the average daily transaction volume and average total value of the stablecoin remain below one million transactions and €200 million, respectively, within the relevant quarter. MiCA introduces this limitation to prevent non-Euro-supported asset-referenced tokens from potentially impacting Eurozone monetary policy and financial stability.
2. USDT: The Leading Stablecoin and Its European Operations
USDT is a cryptocurrency token pegged to the value of the US dollar, issued and managed by Tether (formerly known as RealCoin). Tether’s parent company, iFinex, was founded in Hong Kong in 2012, and its management team includes individuals such as Jan Ludovicus van der Velde (CEO), Giancarlo Devasini (CFO), Philip Potter (Chief Strategy Officer), among others. In 2014, RealCoin rebranded as Tether and announced a partnership with Bitfinex exchange (which is the largest cryptocurrency exchange in Europe and a subsidiary of iFinex). Tether’s primary banking partner, Noble Bank, is registered in Puerto Rico.
USDT was one of the earliest stablecoins to be accepted and used in Europe, known for its stability. Tether claims that each USDT is backed by one US dollar or an equivalent asset and can be redeemed at any time. Tether also asserts that its reserve assets undergo regular audits by third-party audit firms, with the data on its reserve assets and circulation publicly disclosed on its official website. However, the authenticity and transparency of Tether’s reserve assets have been subject to scrutiny, and rumors of its involvement in manipulating Bitcoin prices have circulated.
Nonetheless, due to USDT’s low volatility, high liquidity, and cross-chain compatibility, it has become the most popular and widely used stablecoin in the current cryptocurrency market. In terms of usage in the European Union, USDT can be traded on several cryptocurrency exchanges or platforms licensed within the EU, such as Uphold, Bitfinex, Binance, among others, with the trading volume of USDT on these exchanges accounting for more than half of the global USDT trading volume.
3. How MiCA Affects Stablecoins Represented by USDT
3.1 MiCA’s Impact on the Stablecoin Market
As mentioned earlier, the MiCA bill introduces strict limitations and regulations on stablecoins not supported by the Euro. Of particular note is the provision concerning trading limitations on non-Euro-supported asset-referenced tokens. Non-Euro-supported asset-referenced tokens are those that are not anchored to the Euro or the fiat currency of an EU member state. These stringent regulatory requirements will reduce liquidity in the stablecoin market and shrink its size.
Regarding electronic money tokens, represented by USDT, MiCA specifies, “Electronic money tokens shall be treated as electronic money,” and “Electronic money token issuers shall issue electronic money tokens at par and upon receipt of funds.” This means that electronic money token issuers must issue stablecoins at a 1:1 ratio, legally affirming the issuer’s obligation to maintain asset reserves. Furthermore, MiCA introduces regulations for the reserve funds of electronic money tokens. Firstly, MiCA mandates that at least 30% of the funds received by issuers be held in an independent account at a credit institution, meaning that issuers must maintain a 30% reserve fund for investors to redeem tokens at any time. Additionally, MiCA imposes strict limitations on the use of remaining funds other than the reserve fund. It requires issuers to “invest in safe, low-risk assets,” and the invested assets should meet the conditions of being highly liquid financial instruments with low market risk, low credit risk, and low concentration risk, all denominated in the official currency equal to the electronic money token. It is evident that the main purpose of these measures is to enhance market stability and reduce risks.
According to data from CoinGecko as of October 8, 2023, USDT accounts for 73.5% of the global cryptocurrency market trading volume, far surpassing other stablecoins or fiat currencies. Due to the substantial volume of USDT, it will be regarded as a significant electronic money token by the European Union. Consequently, it will be directly regulated by the European Banking Authority (EBA) and will adhere to stricter regulatory measures, such as independent audits every six months.
3.2 MiCA’s Impact on Stablecoin Issuers
MiCA’s new regulatory rules pose significant compliance challenges for Tether, especially considering that Tether has not openly and transparently disclosed the status and composition of its reserves, nor has it undergone audits by independent institutions. Tether has also been involved in multiple lawsuits and investigations, including reaching an $18.5 million settlement with the New York Attorney General’s Office and facing charges by the U.S. Department of Justice related to bank fraud, money laundering, and illegal operations, among others. In the future, stablecoin issuers represented by Tether will encounter substantial compliance reform costs. Tether should actively advance its own compliance process, establish strong partnerships with EU regulatory agencies and third-party audit firms to enhance its market credibility and competitiveness.
In response to increasingly stringent regulatory requirements, Tether has taken measures to advance its own compliance process. For example, it recently announced a partnership with the Italian branch of BDO International, the world’s fifth-largest accounting firm. In the future, BDO International’s Italian branch will be responsible for auditing the company’s reserve fund assurances and attestation reports. Tether also plans to change its audit report release schedule from quarterly to monthly. Under the MiCA framework, stablecoin issuance will become more compliant and transparent.
References:
[1] EU. (2023). REGULATION (EU) 2023/1113 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL.
[2] TAXDAO. (2023). Interpretation of the EU “Markets in Crypto-Assets Regulation” (MiCA): Implementation Background, Key Contents, and Comparative Analysis with Similar Legislation.
[3] TAXDAO. (2023). Is Cryptocurrency’s “Double-Edged Sword” About to Face Legislative Regulation? Current Status and Outlook on Stablecoin Regulation.
[4] Liu Lei, Zheng Yuqi. (2023). An Interpretation of the EU “Markets in Crypto-Assets Regulation (Draft)” (MiCA). (in Chinese)
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