The deadline for MiCA is looming and its impact on stablecoins as we know them

A new wave of EUR-pegged stables on the horizon

Source: DALL-E

The deadline for MiCA compliance for stablecoins is less than a quarter away and things are going to become interesting in Europe.

For background: Regulation (EU) 2023/1114 (aka. MiCA) entered into force on 29 June 2023, and the deadline for compliance for Titles III (ARTs) and IV (EMTs) is 30 June 2024. Wondering what is an ART of an EMT is a fair question!

• E-Money Token (EMT) — A type of digital asset that aims to maintain a stable value by referencing the value of one official currency, without offering any interest of any short, e.g. a fiat backed stablecoin.
• Asset-referenced Token (ART) — A type of digital asset that is not an electronic money token and aims to maintain a stable value by referencing another value or right or a combination thereof, including one or more official currencies, e.g. a tokenized RWA (Real World Assets).

Why is this important? In essence the legislator is putting a daily transaction limit on non-EURO denominated non-EU domicile tokens equal to EUR 1 million for EMTs and EUR 200 million for ARTs. In other words the market dominant stablecoins like USDT and USDC will have an extremely low transactional cap per day, regardless how the transactional value/volume will be calculated.

This creates a major opportunity for European based firms to jump on the stablecoins wagon and issue EU domicile and EUR denominated tokens given that issuers of such tokens will have to be authorized in some shape or form within the European Union, like PSD2 licensing for payment firms. This in a way is leveling the game for all players, as it is a short of reset.

Although it sounds frustrating for the existing DeFi natives using USD-pegged stablecoins in their day to day workflows, the benefit is that these new stablecoin issuances are not only going to be fully regulated, but they will provide also assurance for funds protection, bankruptcy protection, mint/redeem transparency, proper governance requirements etc. like being a proper Credit or E-Money Institution. This will be a huge confidence boost for a market where some of the largest stablecoins are just black boxes operating on a “trust me bro” basis.

Companies like Societe General (via the Forge acquisition) is one of the largest players entering the field with their own stablecoin and smaller companies regulated under the payments service directives have also launched (or planning to do so) similar tokens like Monerium and Unstoppable Finance. A good question is what will happen to the likes of Stasis EURS that has some preliminary registration with the Maltese Central Bank and the EUR-pegged tokens of Tether (EURt) and Circle (EURC).

Although an opportunity for new companies to enter the space and offer a regulatory compliant service, becoming regulated as per the PSD2 licensing experience is an onerous process that can take anything from 12 to 36 months; thus not 100% startup friendly. On the other hand, regulatory approval provides a unique stamp of approval that distincts such companies as lights of hope in a primarily unregulated or loosely regulated environment, providing an edge even against the behemoths of the industry, primarily for the users and investors who value this type of protection.

Other markets like the UK, Hong Kong and Singapore are moving forward with similar regulations and everyone is anticipating the US action on the matter. The next big question is going to be how aligned and interoperable such regulations are going to be.

In essence, MiCA represents a pivotal moment for the crypto industry, particularly for the stablecoin sector. Its implementation introduces a new era of regulatory oversight and consumer protection, potentially transforming the landscape of digital assets. This regulatory shift not only challenges existing paradigms but also offers a template for global regulatory harmonization in the digital assets space. As the deadline for MiCA compliance approaches, the industry stands at a crossroads, with the potential for innovation and growth balanced against the need for transparency, security, and consumer protection. The evolution of this regulatory framework will undoubtedly play a critical role in shaping the future of stablecoins and the broader digital assets market, setting a precedent for the intersection of technology, finance, and regulation.

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Disclaimer: I am not a financial or tax advisor. These are personal views and do not constitute financial and/or tax advice. Do your own research prior to making any financial decision and/or using any financial product.