As already teased in our second blog post in the series on the topic of stablecoins, this final article will take a closer look at the regulatory aspects of stablecoins.Fittingly, the European Union published the comprehensive MiCA regulation in the European Official Journal on 09 June 2023. It forms the European regulatory framework for crypto-based currencies and thus sets global standards for the regulation of crypto assets. While the desire for uniform regulation of cryptocurrencies in the US is growing, Europe is taking an unusual position as a driver of innovation, even though the regulation will not fully apply until 30 December 2024. It remains to be seen whether this set of rules will only be applied exclusively to the European market in the future or whether the US market, for example, will simply follow or adopt a similar set of rules.
What does the MiCA regulation bring?
First of all, the regulation is a clear signal to the market that the handling of crypto assets in the EU is not to be prohibited or prevented. Instead, a sensible legal framework will be established in which the individual market players can move more securely from now on.
The new regulations provide for new challenges exclusively for the providers of crypto services and the issuers of crypto securities. End customers will feel much less change in their daily actions. However, they clearly benefit from their strengthened rights and increased market transparency.
MiCA licences
Service providers who wish to offer various services in Europe in connection with crypto assets will need a MiCA licence in future. Depending on the service, separate requirements apply to the service provider. The services subject to authorisation under the MiCA regulation are:
- Operation of a trading platform
- Exchange of crypto assets for nominal currency or other crypto assets
- Execution of orders for crypto assets for third parties
- Consulting for crypto assets
- Custody and management of crypto assets for third parties
- Acceptance and transmission of orders for third parties
- Placement of crypto assets
Many companies see crypto currencies as a particularly lucrative business. The granting of a corresponding licence by the supervisory authorities offers companies another possibility to participate in the financial market in addition to the ZAG licence and the banking licence.
Increased requirements for issuers
In addition, the MiCA regulation also imposes requirements on issuers of "other crypto assets" and "stablecoins".
Stablecoins are divided into e-money tokens and value-referenced tokens. The value stability of e-money tokens is always based on exactly one official currency. The value of a value-referenced token can in turn arise from the combination of different goods, rights or crypto assets.
Since stablecoins are the focus of our blog series, we will refer almost exclusively to stablecoins in the following.
Crypto whitepaper for all
All crypto assets that exceed a certain threshold in trading volume, for example, must publish a crypto whitepaper before they are issued for the first time. This is similar to a securities information sheet in a somewhat watered-down form. There, potential buyers will find information about the issuer as well as information about the underlying technology and the business purpose of the token. Companies are liable for damages for the information they publish in crypto whitepapers or marketing communications. The days of exorbitant promises of returns for questionable new coins should thus have come to an end.
Reserve assets and equity
To guarantee a stable coin, the issuer must hold the value of the token as reserve assets at a ratio of 1:1. This guarantees the token holders' right of withdrawal or claim at all times. Furthermore, the composition of these assets must be openly disclosed and must withstand liquidity requirements, whereby a portion of the assets may be invested in low-risk transactions. Equity is either 350,000 euros, 2 % of the average reserve assets or one quarter of the previous year's fixed overhead costs, whichever is the largest. The equity can be upgraded or downgraded by 20-40 % depending on the risk potential of the token or the industry.
Separation of assets
The MiCA regulation stands for a clear separation between assets of clients and those of a service provider or issuer. Whether it concerns the retention of client funds, client crypto assets or other client holdings, everything must be strictly separated from each other. The reserve assets of a stablecoin must also be strictly separated from the issuer's corporate assets and held per token issued. Thus, even in the event of a possible insolvency of the custodian, it should be guaranteed that the customers retain the claim to their assets.
Case study FTX
Examples such as the crash of FTX showed in the past the impact it can have on the whole market when issuers of large tokens misappropriate their customers' deposits. FTX had lent customers' deposits as collateral for speculative crypto trades to the related company called "Alameda". Again, as collateral for these lent deposits, they accepted the company's own FTT token. When this token lost its value and the house of cards collapsed, the investors' deposits could no longer be bought back, as a result of which they are still waiting for their invested assets today.
Significant stablecoins
So-called significant stablecoins also have a major impact on financial stability in the EU. According to the regulation, a coin is considered significant as soon as it meets three of the following criteria:
- 10 million customers (natural persons or legal entities)
- 5 billion market capitalisation (total value)
- 1 billion reserve assets
- 2.5 million trades per day or €500 million per day
- Special interconnectedness with the financial system
- Issuer is a gatekeeper according to regulation (EU) 2022/1925.
- Issuer issues at least one additional stablecoin and provides at least one crypto service.
These are automatically subject to supervision by the EBA and are subject to further duties and requirements. This includes i.a. further requirements for the reserve assets and their liquidity, which are regularly tested with the help of liquidity stress tests.
Finally, it remains to be seen how the MiCA regulation will affect the trading of stablecoins. ESMA, with the support of the EBA, will publish further specifications on the technical implementation of the regulations in the next ten months – which means that there are still many developments to come.
Authors: Benjamin Schreck, Jan Gäth
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