The Future of Stablecoins in Europe

The Future of Stablecoins in Europe Navigating MICA Regulations

In October 2022, the European Union made a historic breakthrough by reaching a consensus on the pioneering Markets in Crypto-Assets (MiCA) Regulation. Following ratification by the European Parliament, MiCA now stands as the world’s first comprehensive regulatory framework tailored specifically for cryptoassets. Its core objectives are protecting consumers and investors, ensuring financial stability, and nurturing innovation within the rapidly evolving crypto economy.

This momentous achievement gained further momentum on May 16th, 2023, when the Finance Ministers of all 27 EU member states unanimously approved the legislation at a meeting of the Economic and Financial Affairs Council (EcoFin). By backing MiCA without any objections, the EcoFin council strongly endorsed the regulation, underscoring its immense significance.

Hailed as the most expansive regulatory framework for cryptoassets globally, MiCA has attracted worldwide attention from the crypto community. While concerns have surfaced about potential restrictions on mining and Bitcoin trading within Europe, MiCA’s overarching aim is striking a balance between innovation, consumer protection, and financial stability. Its holistic methodology has positioned MiCA as a model for jurisdictions worldwide to consider when designing their crypto regulations.

The move to regulate cryptoassets aligns with the EU’s broader ambition of becoming a global leader in tech regulation. Initiatives like the General Data Protection Regulation, Cybersecurity Act, and the ePrivacy Regulation exemplify the EU’s proactive approach to establishing global standards for emerging technologies. Embracing the promising crypto industry is a strategic decision that blends seamlessly into the EU’s forward-thinking regulatory outlook.

In the following sections, we delve into MiCA’s intricate details, aiming to provide a comprehensive understanding of its provisions, implications, and potential impact on the European crypto landscape.

The Core Objectives Underpinning MiCA

The proposed MiCA framework is underpinned by key objectives focused on:

  • Creating legal certainty for crypto assets beyond the scope of existing EU financial services legislation, catering to the distinctive needs of the crypto industry.
  • Replacing the patchwork of diverse national frameworks currently applicable to crypto assets not covered by present EU financial services law.
  • Instituting uniform and cohesive regulations for cryptoasset service providers and issuers at the EU level, fostering harmonized standards and oversight across member states.
  • Introducing tailored regulations for stablecoins, including those marketed as e-money, to address their unique features and potential impacts on financial stability.

These goals collectively form the backbone of MiCA’s comprehensive and inclusive regulatory approach, devised to enable responsible growth, innovation, and advancement of the crypto industry. The central pillars of this methodology are prioritizing consumer protection and ensuring regulatory consistency.

Classification of Digital Assets under MiCA

Within the MiCA framework, the European Union has established a detailed taxonomy for classifying the array of digital assets in existence. This classification system categorizes these assets based on their distinct characteristics and intended functionality.

The first category is “crypto-assets”, encompassing various digital representations of value or rights that can be electronically transferred and stored using technologies like distributed ledgers. Prominent examples of crypto-assets are Bitcoin and Ether.

Within the broader crypto-asset classification, there exists a sub-type known as “utility tokens”. These tokens serve the singular purpose of providing access to specific goods or services offered by their issuers. The requirements for issuing utility tokens are relatively less stringent, although it is expected that only a limited number of assets will fall into this niche category.

Another classification is “asset-referenced tokens” (ART). These tokens aim to maintain a stable value by referencing or pegging to a diverse array of assets, including fiat currencies, commodities, other crypto-assets, or singular non-fiat assets. The advent of this category was influenced by the original concept of the Libra token, which pegged its value to a basket of fiat currencies akin to the IMF’s Special Drawing Rights.

Lastly, we have “e-money tokens” (EMT), designed to preserve a stable value by referencing a single fiat currency such as USDC, USDT, BUSD or EUROC. The regulatory requirements and overall concept for e-money tokens draw inspiration from existing EU regulations governing electronic money.

Determining the Scope of MiCA

The MiCA framework oversees the regulation of various digital representations of value or rights that employ distributed ledger technology (DLT), with a few exceptions.

MiCA applies to all crypto-asset service providers (CASPs) operating within the EU. Stablecoin issuers face binding liquidity requirements and must maintain a presence in the EU. Moreover, stablecoins fall under the supervision and direction of the European Banking Authority (EBA), which oversees stablecoins with over 10 million users or assets above €5 billion. Additionally, the European Central Bank (ECB) can reject any stablecoin it deems concerning.

Crypto-Assets Outside MiCA’s Regulatory Reach

Despite its extensive scope, MiCA’s regulatory framework does not encompass some emerging paradigms in the digital asset sphere. Significantly, decentralized finance (DeFi) and non-fungible tokens (NFTs) currently exist outside the jurisdiction of MiCA regulations.

DeFi represents a revolutionary modality for financial services, utilizing automated protocols to eliminate reliance on traditional intermediaries. It is vital to note that DeFi operates beyond the regulatory scope outlined in MiCA.

MiCA’s regulations primarily target businesses, including both natural and legal persons, alongside specific undertakings. The EU has clarified that decentralized autonomous organizations (DAOs) and protocols are not the central focus of this latest addition to the regulatory framework. This regulation explicitly clarifies that if crypto-asset services are delivered in a completely decentralized manner, with no intermediary involvement, they are not subject to MiCA’s jurisdiction.

For DeFi projects aiming to operate within the EU while staying out of MiCA’s scope, the only feasible option is to establish and demonstrate a state of complete decentralization. By substantiating that their operations adhere to a purely decentralized structure, these initiatives can function independently and steer clear of MiCA’s regulatory reach in the EU.

Similarly, NFTs representing distinct, indivisible tokens connected to various digital assets like art, videos or tweets are not addressed by MiCA, unless they constitute part of a designated “collection” intended for sale. In instances where NFT collections fall within MiCA’s ambit, the responsible entities must furnish a detailed “white paper” elucidating the product’s nature and on-chain mechanisms.

Additionally, MiCA does not encompass crypto-assets or related services classified as securities, since this would create duplicative regulatory regimes. Services associated with tokenized securities come under the jurisdiction of the Markets in Financial Instruments Directive (MiFID).

Moreover, MiCA does not provide granular Anti-Money Laundering (AML) stipulations for crypto businesses. AML regulations are presently being discussed within the Anti-Money Laundering Regulation (AMLR) framework or have already been finalized under the Transfer of Funds Regulation (TFR), which implements the Financial Action Task Force’s (FATF) travel rule. These regulations seek to combat money laundering and terrorism financing through payment channels.

Notably, Know Your Customer (KYC) mandates and identification procedures are only obligatory for transactions between regulated CASPs. Transactions occurring between self-hosted wallets are exempt from requirements outlined in the Transfer of Funds Regulation.

Lastly, central bank digital currencies (CBDCs) also do not fall under MiCA’s regulatory umbrella.

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Navigating MiCA: Key Compliance Requirements

Environmental Disclosures

As per MiCA’s provisions, crypto businesses must provide transparency concerning their environmental and climate impacts. This necessitates CASPs to incorporate precise details about the particular blockchain consensus mechanism utilized in their operations within a publicly accessible whitepaper. Further guidance on the exact format and content of these environmental disclosures by CASPs will be formulated by ESMA (European Securities and Markets Authority) to ensure clarity and standardization in reporting.

Regulatory Mandates for Crypto-Asset Issuers

  • Crypto-asset issuers (with exceptions for utility tokens and small-scale crypto-assets) must prepare a comprehensive white paper furnishing extensive information about the project, issuer, related risks, employed technology, token economics, and the environmental impact of the token’s consensus mechanism.
  • Before publishing the white paper, crypto-asset issuers have to notify their respective national competent authority at least 20 days in advance. While explicit approval is not required by MiCA, the authority can prohibit the issuance of the crypto-asset.
  • Alongside standard requirements like ethical conduct, conflict of interest disclosure, and clear marketing communications, MiCA includes an intriguing provision granting retail investors who participated in the token offering the right to withdraw within 14 calendar days without fees.
  • The exact disclosure requirements and white paper templates will be determined by the EU supervisory bodies.

Regulatory Mandates for Asset-Referenced Tokens (ARTs)

  • Reserve Management: The issuer must adhere to strict standards for reserve management, encompassing aspects such as segregation, custody, and investment.
  • Wind-Down and Resolution Plans: The issuer must have comprehensive contingency plans in place for wind-down and resolution in case of unforeseen events.
  • Higher Standards for Significant Issuers: “Significant” ART issuers face even tighter requirements, including maintaining their own funds equaling 3% of the ART supply. Additionally, they must satisfy extra criteria related to interoperability, liquidity, and governance.
  • Criteria for “Significance of ARTs” include (but are not limited to): 10 million holders; €5 billion market capitalization; daily transactions exceeding 2.5 million or €500 million in value.
  • Supervision by the European Banking Authority: Oversight of these major ART issuers falls under the authority of the European Banking Authority, rather than individual national financial regulators.

Regulatory Mandates For E-Money Tokens (EMTs)

General Requirements:

  • Only regulated e-money institutions or credit institutions can issue EMTs in the EU.
  • Competent authority notification is mandatory for EMT white papers.

E-Money Token Specifics:

  • EMTs have strict redemption obligations and cannot provide interest to holders.
  • Similar “own fund” (2% of supply) and reserve management obligations as ART issuers.
  • Investments restricted to high-quality liquid assets.

Significant EMT Issuers:

  • Fall under the supervision of the European Banking Authority.
  • Face heightened requirements related to own funds (3%), interoperability, liquidity, resolution, and governance.

Market Manipulation Safeguards

MiCA also encompasses measures to tackle insider trading, which has concerned investors in CASPs. Under MiCA, CASPs must publicly disclose inside information about their organization and tokens as soon as realistically feasible. This would need to be achieved in a manner guarantees swift and widespread dissemination to the public.

One of the most prevalent issues raised regarding crypto-assets is wash trading. In this context, wash trading entails executing a trade where the seller is on both sides of the transaction, creating a deceptive impression of an asset’s value and liquidity. As per MiCA, CASPs must be fully transparent and implement surveillance and enforcement systems to deter any potential market manipulation.

MiCA’s Implementation Timeline

Mica is expected to come into effect following a transitional phase of 18 months, implying its likely implementation around Q4 of 2024. After this transition period elapses, all crypto-businesses operating within the EU will be obligated to obtain authorization as crypto-asset service providers.

The Potential Impacts of MiCA

Emergence of the EU as a Global Crypto Hub – Unlocking Economic Potential

The establishment of unambiguous regulatory frameworks amid the prevailing uncertainties globally has positioned the EU to attract capital, talent, and businesses worldwide, especially those interested in token issuance. This favorable climate can catalyze an economic and technological renaissance across the EU.

Major Institutional Adoption Within the EU

With MiCA’s rollout, institutional participation and activity within the EU crypto market is expected to surge considerably. Currently, only a small proportion of institutional funds in Europe are exposed to crypto-assets, primarily due to regulatory ambiguities. However, MiCA’s arrival is likely to assuage these concerns, prompting leading European banks to offer crypto-asset services such as custody, trading, and issuing e-money tokens or stablecoins.

Setting Global Regulatory Standards

As one of the world’s largest economic blocs, the EU wields significant influence in global markets. Its regulations and benchmarks often champion high levels of consumer protection, ecological sustainability, and data privacy. Consequently, when crafting their own rules, other nations and regions may take inspiration from EU regulations to elevate consumer safeguards and ensure compatibility with the EU. This dynamic has been evidenced in spheres like climate change mitigation, sustainable finance, and digital rights where the EU has taken the lead in setting standards, for instance through the profound worldwide impact of GDPR.


MiCA represents a historic development that promises to transform the regulatory landscape for cryptocurrencies within the European Union. Its balanced and proactive approach can unleash innovation and growth while prioritizing consumer welfare. For crypto businesses and investors worldwide, MiCA offers valuable regulatory insights that may shape the trajectory of crypto regulation globally.