Europa on the back of Zeus, who carries her through the waters. Painting by Valentin Serov, 1910. Image copyright in the public domain.

Yesterday, the first parts of the huge EU regulation MiCAR came into force. They mainly affect stablecoins. We explain what they mean and show how they are being received so far.

The EU likes to see itself as the world champion of regulation. In itself, that is not necessarily a bad thing, as long as it is not the only strength that the location brings to the table.

With MiCAR, a regulatory package on cryptocurrencies came into force yesterday, of which the EU is particularly proud. For years, institutions, MPs and member states have discussed, drafted, haggled, wrangled and refined to cover all areas of the market, as strict as the matter requires, but loose enough to give companies room to breathe.

According to the EU’s beautiful vision, MiCAR is intended to “unleash the full potential of crypto assets”, because only appropriate regulation gives the market strength.

Andreas Wiebe, who issues the (precious) metal-backed “precious coin” from Switzerland, partly agrees: “From an investor’s point of view, MiCAR is good because it provides security.” For the issuers, however, it is “not a quick fix. I already see many problems for companies that lack the financial stamina as startups in the crypto industry.”

Wiebe’s perspective could be representative of the market: one sees opportunities – but, almost more so, problems. Since yesterday, things have become serious: the first chapters of MiCAR came into force, parts III and IV of a total of VI.

We will explain here what this means and give a little insight into how the market is reacting to it.

BaFIN now regulates issuers of stablecoins

As of yesterday, BaFIN is responsible for supervising the issuers of “asset-referenced tokens” in Germany. This is what Parts III and IV regulate.

Asset-referenced tokens refer to two types of tokens: Firstly, “e-money tokens” (EMT), which are a digitalized representation of conventional currencies such as the euro or dollar. In other words, stablecoins. Part IV covers these. Part III, on the other hand, addresses “asset-referenced tokens” (ART), whose value is not tied to fiat money, but to other valuables, such as gold.

Real cryptocurrencies such as Bitcoin and other tokens, such as utility or governance tokens, fall into a different category and are not yet affected. The new rules will only apply to them from December 30, 2024.

The issuers of EMTs and ARTs, on the other hand, have had to comply with the MiCAR rules since yesterday. For example, they must demonstrate certain asset reserves, hold these in EU banks in certain proportions and give customers the opportunity to withdraw their deposited money at any time.

Furthermore, MiCAR sets upper limits on transaction volume. At 200 million euros per day, this limit is so ridiculously low that it effectively amounts to a ban on the major stablecoins and makes it virtually impossible for such a system to ever be formed in the EU. But the angel is in the details here, as we will see later.

In Germany, BaFIN is now responsible for monitoring these issuers. For this purpose, it has formed the “Team ZK”: the supervision of payment institutions and crypto transactions. In addition, it works closely with the European Banking Authority (EBA), the European Securities and Markets Authority (ESMA), the European Central Bank (ECB) and the Deutsche Bundesbank.

So there is an impressive and powerful regulatory body that has set up a competent team to monitor, in coordination with numerous other authorities nationwide, all those issuers of stablecoins and other asset-based tokens – which practically do not exist.

Ein No-Go

All in all, it is doubtful whether the EU is really unleashing the “innovation potential” with MiCAR – or whether it has built a cannon to shoot at sparrows that have not even begun to build a nest. At least one looks in vain for globally relevant issuers of stablecoins in the EU.

The Financial Times says that MiCAR already seems “outdated, likely to stifle innovation and prevent EU citizens and businesses from using products available in the rest of the world.” At the same time, key aspects of the market, such as NFTs and staking, are either absent or inadequately covered in MiCAR. The sparrows are shot if they dare to go near the roof, but the hawk is ignored.

The first effects are already apparent, reports the FT. Last month, Paxos, an issuer of stablecoins, announced that “lift”, an interest-paying token tied to the dollar, would be regulated in Abu Dhabi. The EU was a no-go – because of MiCAR.

The problem is more fundamental. MiCAR apparently prohibits paying interest with stablecoins; in addition, the issuers must hold 30 percent of their reserves in EU banks, and 60 percent as they grow. This restricts the issuers’ financial freedom of action far too much; it thwarts exactly what makes stablecoins such an exciting business at the moment. “MiCAR has little to do with the reality on the ground,” the FT quoted an unnamed editor as saying.

Peter Großkopf from Iron Bank is also skeptical as to whether MiCAR is really the big innovation-driving success. He fears that MiCAR will lead to the “delisting of US stablecoins,” he explains to Wirtschaftswoche. At least when it comes to Tether, the world’s largest stablecoin, he may not be wrong.

Back in April, Tether CEO Paolo Arduini said that they were neither about to try to apply for a license nor did they plan to do so in the medium term. In essence, they are giving up on Europe, not least because demand from Europe is irrelevant from a global perspective. Tether has now been a little more polite in its response to Wirtschaftswoche, but remains consistent on the matter: they have not yet applied for a license, and for this to happen, they need “strategic adjustments and cooperation with regulatory authorities.”

In order to prevent trouble with the regulators, the first exchanges, such as OKX, have announced that they will suspend trading in Tether in the EU; Binance will also restrict the “availability of unauthorized stablecoins” for European users. Coinbase and Kraken, on the other hand, are more cautious and want to observe how things develop first.

“The European crypto market will change dramatically this year.”

Other players are adapting to the new rules. At Swarm Markets, a Berlin-based startup that tokenizes real world assets (RWA) – one of the few globally relevant innovation drivers from Germany – MiCAR is forcing them to do some mental gymnastics, reports the FT.

Among other things, the startup is issuing a gold-backed token. Since MiCAR makes it difficult to create assets based on fungible assets, Swarm stamps the gold into the blockchain as an NFT, similar to coins. Because NFTs are not (yet) regulated by MiCAR. This gives Swarm at least one to two years until the EU also aims its regulatory cannons at NFTs.

Circle, on the other hand, plays by the rules. The issuer of the second largest stablecoin, USDC, has received a license in Paris as an “Electronic Money Institution”. This makes Circle the first global stablecoin issuer that is MiCAR-compliant.

“Starting today, EU customers can open their Circle Mint accounts with Circle France to directly create and redeem USDC and EURC in a MiCA-compliant manner via common EU payment systems such as SEPA and SEPA Instant,” rejoices Patrick Hansen, Circle’s EU Representative.

But even with Circle, you can’t avoid a bit of mental gymnastics. While the EURCs from Circle France are “fully issued,” the USDCs are only “minted.” Therefore, the MiCAR rule that 60 percent of the reserves must be held in EU bank accounts only applies to the EURC, not the USDC.

The second bitter pill of MiCAR is the transaction limit of 200 million. However, this apparently applies mainly to payments to merchants, i.e. in trading, and less to investment transactions, as is common in the crypto market. Therefore, this pill is much less bitter than it seems at first glance.

For Circle, MiCAR is therefore a great opportunity, explains Hansen: “The European crypto market will change significantly this year. Non-compliant stablecoins will disappear from EU exchanges and service providers.” Circle sees this as a “tremendous opportunity for the growth of EURC and USDC” and will therefore “increase efforts in the EU.” Currently, Hansen is pleased, “among the top 50 stablecoins, only USDC and EURC are MiCA-compliant.”

One man’s sorrow is, in this case too, another man’s joy.

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