As promised last week, this week we take a deep dive into two landmark crypto legislations that were politically approved in the EU on June 29th and June 30th: The Transfer of Funds Regulation (TFR) and the Markets in Crypto Assets (MiCA). Due to their expansive nature, coverage of these two regulations will extend into next week’s post as well. At the outset, I should point out that the discussion here is based on what has been reported by news outlets and insiders to the negotiations since the text of these two draft legislations has not yet been made public.
Let’s begin with MiCA and go back 4 years in time. The crypto world looked quite different back then. Investors were euphoric about the 2017 bull run of Bitcoin, and the plans of Facebook (now Meta) to launch “Libra,” the first stablecoin ever, became public. Moved by concerns about EU financial markets, the European Commission (EC) requested in its FinTech Action Plan that the European Banking Authority (EBA) and European Securities and Markets Authority assess the suitability of EU financial services regulations for crypto-assets. The conclusion was that most crypto-assets fall outside the scope of said regulations. As a result, the EC started developing a new crypto regulation in 2018. Two years later, MiCA was born—a 168-page draft legislation that sought to “replace existing national frameworks applicable to crypto-assets not covered by existing EU financial services legislation and also establish specific rules for…‘stablecoins.’” In June 2022, an updated version of MiCA was approved by negotiators from the European Parliament, Council, and Commission, which is a major step towards enacting MiCA as an EU regulation. While it is not fully clear how similar the 2022 version is to the 2020 version, here are some of the highlights of what we know about the 2022 version:
MiCA broadly applies to crypto-assets, defined as “digital representations of value or rights which may be transferred and stored electronically, using distributed ledger technology or similar technology.” As such, MiCA applies to major cryptocurrencies like Bitcoin and Ether. The main goal of MiCA, however, is to regulate the issuance of stablecoins in the EU. In this vein, MiCA creates not one but two categories of stablecoins: “asset-referenced tokens,” which are cryptocurrencies backed by a basket of different fiat currencies, commodities or crypto assets (think of Libra), and “e-money tokens,” which are cryptocurrencies backed by a single fiat currency like the USD (think of USDT or USDC).
Herein lies one of the main differences between MiCA and the Lummis-Gillibrand bill (LGB) of the U.S.: the regulation of stablecoins in the LGB is only secondary to the regulation of major cryptocurrencies, such as Bitcoin and Ether. So, while almost one-third of MiCA is dedicated to stablecoins, the LGB does not lay out a detailed regulation for stablecoins.
2. White Papers:
With few exceptions, issuers of all crypto-assets under the 2020 MiCA are required to publish white papers on the crypto-assets they are offering to the public and to notify competent authorities in any EU country of such white papers. The white paper is not subject to any pre-approval unless the crypto-asset is a stablecoin and, once published, it enables the issuer to offer the crypto-asset anywhere in the EU. However, after national competent authorities are notified, they have the power to suspend or prohibit the offering, require more information to be included in the white paper, or declare that the issuer is not in compliance.
So far, there is no indication that the 2022 version of MiCA has modified this white paper obligation. But, again, this is very different from that of the LGB, which imposes no comparable obligation on issuers of crypto-assets, especially stablecoin issuers.
The regulation of stablecoins is the primary goal of MiCA. Under the 2020 MiCA, issuers of stablecoins must maintain liquid reserves with a 1:1 ratio and always enable redemption of their stablecoins at the same ratio. Issuers also must invest their reserves in assets that are secure and low-risk. Moreover, they must disclose any pending claims on themselves or their reserves and are prohibited from paying interest to the holders of their stablecoins. The EBA is empowered to determine that a stablecoin issuer is “significant,” in which case the issuer would be subjected to stricter capital and investor standards and more thorough supervision by the EBA. According to insiders to the recent negotiations, the 2022 MiCA preserves the “significant” specification of certain stablecoin issuers. More importantly, it imposes a cap of €200 million on per-day transactions conducted in stablecoins which are used widely as a means of payment.
The disclosure and reserve requirements imposed on stablecoin issuers under MiCA are very similar to those of the LGB; they both make it impossible for algorithmic stablecoins such as TerraUSD to exist. But beyond that, the contrast between MiCA and the LGB is stark, especially with respect to the cap imposed on daily transactions in stablecoins. Unlike MiCA, the LGB imposes no limitations whatsoever on the volume of per-day transactions conducted in stablecoins. Also, the LGB does not envision regulating stablecoins as part of the financial system; hence, it recognizes no comparable role for U.S. regulators that are similar to the EBA.
In your opinion, what are the most striking aspects of MiCA that we have discussed so far? Which do you find necessary? Which do you find overly restrictive? And do you prefer the approach of MiCA or the LGB to the regulation of stablecoins?
See you next week!