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The European Union’s “Markets in Crypto Assets Regulation” (MiCA) marks a major milestone for the crypto industry.
With MiCA set to enter into phased implementation this summer, the EU is inviting crypto market participants into the regulatory perimeter for the first time. And while there are still uncertainties and challenges ahead, there is hope that MiCA will prove to be an important step towards long-term stability for crypto markets, enhanced protections for users and a more attractive investment environment for entrepreneurs.
The drafters of MiCA got a number of things right. One of them was to acknowledge that certain aspects of the crypto ecosystem (like decentralized smart contracts and NFTs) do not map neatly onto existing European concepts for financial system regulation (i.e., the MiFIDs). These activities were rightly left out of MiCA, with an understanding that they would become subject to further rulemaking at a later date.
But would it have been better for stablecoins or “e-money” tokens to have received the same treatment?
As it stands under MiCA, certain USD-referenced “e-money” tokens — including USDT, USDC and BUSD — are subject to caps on issuance and transactions. Per EU rules, caps for these instruments (as well as certain others) are 1 million transactions by volume, or 200 million euros by notional value.
Not only are the caps — as adopted — far too small to support current levels of activity, but their enforcement is likely to result in major disruptions to the proper functioning of the crypto ecosystem.
Globally, the total market capitalization for stablecoins sits at a staggering $162 billion. USDT, USDC and BUSD collectively comprise roughly 75% of that amount. The European share of these figures is already orders of magnitude beyond the present limits, ensuring an almost immediate need to take action to curtail its use when MiCA is implemented.
The fundamental reason this all matters is because stablecoins have become integral to enabling a number of critical use cases — particularly non-speculative use cases.
Read more from our opinion section: The time for US stablecoin regulation is now
Importantly, stablecoins serve as the bridge between the fiat-based world of traditional finance and digital assets. As a reliable store of value for investors, they are a safe haven from more volatile assets — the opposite of the “crypto casino” that has come to be regarded so skeptically.
Stablecoins have proven essential in cross-border payments, not least because they can protect those in countries facing hyperinflation or other local currency debasing risks. Stablecoins are also frequently used to interact with smart contracts, and therefore form a central component of the lending and yield generating ecosystem.
By restricting such a thriving and growing area of the digital assets ecosystem, MiCA runs the risk of undermining one of its primary goals: fostering a vibrant and innovative industry within the region.
The e-money limitations could also put Europe on the backfoot compared to other jurisdictions that do not impose such measures. While these restrictions are likely intended to protect the euro and mitigate the potential systemic risks posed by large-scale stablecoin usage, overly restrictive limits will stifle the growth and adoption of stablecoins and create significant disadvantages for EU-based stablecoin issuers and users.
For the foregoing reasons, it is imperative that the competent European authorities must revisit e-money restrictions.
As the European Securities and Markets Authority, the European Banking Authority and other European authorities engage in secondary rulemaking and technical standard-setting, there is still hope that such revisions can be accomplished without waiting for a MiCA II. For example, authorities could adopt a more nuanced, tiered system that instead scales limits based on the size and maturity of the issuer.
Whatever the method, it should be possible to strike a better balance of competing interests and concerns than what we have in MiCA today.
As I have argued in other contexts, stablecoins are one of a group of “weapons of mass adoption” at play for the digital asset industry. These products and services, like ETFs and stablecoins, are capable of entering the lives of consumers and giving them a positive experience of blockchain technology with an extremely low bar to entry. Stablecoins fit that definition across multiple factors. As a product offered by regulated institutions, they serve as a point of entry for banks and other financial issuers. In being used by consumers, they are the perfect instrument to enable Web3 commerce and smart contract interaction — in many cases seamlessly as part of gaming or other internet environments.
For all their consumer benefits, stablecoins also touch on questions of monetary policy, sovereign debt issuance and competition for the export of global soft power. European regulators are right to proceed cautiously — but not at the expense of a lynchpin technology for the entire crypto ecosystem. Ultimately, if digital asset markets are to thrive in Europe under MiCA, stablecoins must be given the conditions to thrive too.