Stablecoins: the great blur in Europe

From 30 June 2024, stablecoin issuers will have to comply with a set of rules, the details of which have not yet been clarified. This lack of clarity benefits traditional institutions.

The imminent adoption of the European MiCA regulation is seen as a major event, particularly in the stablecoin sector. "Few people are aware of it yet, but the impact is going to be huge", blows a source at the heart of the wheels in Brussels.

From 30 June 2024, stablecoin issuers will have to comply with the part of the text that concerns them in order to be distributed in Europe. And it's fair to say that this could have significant consequences: to date, none of the giants of the sector, namely Tether and Circle (which account for 90% of a $120 billion market), has yet obtained a regulatory sesame.

"The issue of regulation will be to favour those denominated in euros because it is a matter of sovereignty, we remember how much Meta's Libra project made a mark in 2019 within the European institutions," points out Morgane Reicher, a lawyer at Kramer-Levin and a member of the legal committee of the professional association for the development of digital assets (Adan).

Thus, the constraints will differ depending on the currency represented.

A cap to limit dollar-denominated stablecoins

Non-euro-denominated stablecoins (mainly Tether's USDT and Circle's USDC) will have to obtain electronic money (EME) or credit institution approval, but above all could be limited to a daily trading cap of €200 million.

But how will these "exchanges" be counted? Volumes on exchange platforms? The volumes of stablecoins used for on-chain transactions? This aspect has not yet been fully clarified.

In the event that flows recorded on Exchanges were included in the cap, this would sound the death knell in Europe for USDT and USDC, whose trading volumes far exceed the daily €200 million threshold.

"MiCA is quite restrictive with stablecoins, particularly on volumes," feared Paolo Ardoino, CEO of Tether, when The Big Whale interviewed him in the spring of 2023. "The risk is that there will be no stablecoin in Europe at all", he huffs.

"The ban on the distribution of major dollar stablecoins such as USDT or USDC could severely limit the liquidity available on exchange platforms operating in Europe if the regulators apply the regulations without tolerance from 30 June next year", warns the head of one of them.

Euro stablecoins still modest

On the other hand, the cap will not apply to stablecoins referring to the euro. The latter will mainly have to obtain electronic money (EME) or credit institution authorisation. "The former being significantly simpler to obtain for a crypto player", Morgane Reicher details.

This should be a formality for SG-Forge, Société Générale's blockchain subsidiary, which issues the EURC stablecoin (Euro Convertible, €10 million in circulation) and is a potential heavyweight in an increasingly regulated ecosystem.

Now it remains to be seen how the natively crypto players will manage to pull their weight. The only giant with a massively distributed euro stablecoin project is the American company Circle, which has been offering its EUROC since 2022 (52 million euros in circulation). In March 2023, the company announced its intention to be regulated in France and to obtain EME approval. Will this be enough to be ready by 30 June 2024?

"An EME authorisation takes around 12 months to obtain, nevertheless as the subject is relatively new for the regulator, it could take longer than expected," insists William O'Rorke, a partner lawyer for ORWL.

"This implies that the reserves used to support the value of stablecoins must be hosted by a European bank, investment firm or provider of crypto-asset services and that the issuer must have a registered office in Europe," adds Frédéric Lacroix, partner at law firm Clifford Chance.

As for Tether, which also offers a stablecoin in euros with its EUROT (36 million euros in circulation), it is quite likely that no case will be presented to European regulators for either its USDT or its EUROT.

In fact, its CEO Paolo Ardoino has never announced his intention to comply with MiCA, preferring to focus on areas of the world where regulation is more flexible or even virtually non-existent. "It is not in Europe or the United States that our products are most used, but in regions where the financial system is less developed, such as South-East Asia, Africa and South America", he explains.

Finally, on the start-up side, Finland's Monerium and France's Salvus are in battle order, as they already have EME approval. But although ambitious, these projects are still modest in the ecosystem: Monerium's EURe is worth just €1.2 million and Salvus' stablecoin has not yet been launched.

Note that US exchange platform Gemini has also obtained EME approval in Ireland, but has not yet publicly announced a euro stablecoin project.

Implementation still very unclear

"June 30, 2024 is a very short deadline, given that no technical implementation standards have yet been published by European regulators regarding stablecoins," explains Marina Markezic, co-founder and executive director of The European Crypto Initiative, one of the sector's main lobbies.

And there are many sticking points. In particular on two, and not the least:

👉 The first concerns "significant size" stablecoins. For these, MiCA provides for additional framework standards. To qualify them as such, the text wants to base itself on the number of holders, the number and value of daily transactions and the level of interconnection with the financial system. "But to date, no precise threshold has been determined by the regulators", regrets Marina Markezic.

👉 The €200 million limit on stablecoins in dollars would apply in the context of means of payment. But here again, the term "payment" has not been clearly defined by the regulations, point out several specialists.

"There is also a risk that PSAN approval will not be enough for crypto players to offer regulated stablecoins to their users because of a draft regulation on payment services outside MiCA," warns Karima Lachgar, current CEO of Olky Wallet and former lawyer at Osborne Clarke.

These concerns need to be clarified by the regulators, in particular through the RTS (regulatory technical standards). These will not be published until early 2024.

Finally, it is not yet known what will happen to so-called "decentralised" stablecoins. Some players, such as Angle Protocol, the issuer of agEUR, are banking on this feature to avoid having to obtain EME approval from 30 June next year. It's a risky strategy, as the 'decentralised' aspect has yet to be clarified by European regulators.

"Generally speaking, MiCA has been very tough on stablecoins from the environment of native crypto players, so institutional players like Societe Generale would be wrong not to take advantage of this," slips a good industry insider.

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