The European crypto regulation, Markets in Crypto Assets (MiCA), heralds a new era for a sector that will provide access to around 18% of global crypto trading volumes.
In an effort to create a framework across all European Union (EU) member states, MiCA has required that from June 30, all stablecoin issuers hold an Electronic Money Institution (EMI) license ). It imposed strict compliance requirements on stock exchanges.
Some exchanges have adjusted their offerings to only include stablecoins that meet European crypto regulations. They want to retain access to a potential market of more than €200 million when MiCA is fully implemented by the end of the year.
MiCA is part of the EU’s digital finance program designed to mitigate crypto risks. It applies to crypto assets not covered by current financial legislation, in particular stablecoins and crypto asset service providers.
This is “an important milestone,” said Circle CEO Jeremy Allaire. This brings “digital currency to mainstream scale and acceptance,” he said.
Market capitalization of cryptocurrencies since the beginning of the year, source: TradingView
European Crypto Regulations Incentivize Crypto Exchanges and Stablecoin Issuers’ Response
In response to the MiCA, California-based exchange Coinbase COIN will delist unauthorized stablecoins that are not MiCA compliant.
“We intend to restrict the provision of services with stablecoins that do not meet the MiCA requirements,” Brian Armstrong, CEO of Coinbase, told CoinDesk on October 11.
Binance, the world’s largest cryptocurrency exchange, announced in early June that it would not remove unauthorized stablecoins on site. But this will limit their availability for European users “only on certain products”, he specifies.
Paypal PYPL issued its own regulated stablecoin, PayPal USD (PYUSD), through Paxos on August 7, 2023. PayPal operates under an EU banking license in Luxembourg, which gives it commercial access to the region under EU law .
Circle, the issuer of USDC and EURC, has obtained an EMI license. It did so under the aegis of the French banking regulator, the Prudential Control and Resolution Authority. USDC has outperformed USDT by over 10% year to date.
USDC vs USDT Crypto market capitalization since the beginning of the year, source: TradingView
European crypto regulations weigh heavily on consumer protection
MiCA requires digital asset operators to obtain a license in an EEA member state to operate across the EU. Issuers of stablecoins with a fixed reference to a fiat currency, called e-money tokens, must hold at least 30% of their funds in bank deposits.
For stablecoins deemed “significant,” at least 60% of fiat reserves must be distributed among multiple institutions. This is based on criteria such as market capitalization, user base and trading volume.
European crypto regulations require stablecoin issuers to disclose detailed information about their reserve assets and respect liquidity. They must maintain capital standards and ensure consumer protection.
For example, stablecoins must be backed by a liquid reserve with a 1/1 ratio and partly by deposits.
EU crypto regulations require risk disclosure
In addition, MiCA requires the publication of white papers detailing the risks and potential impacts of crypto-assets. It also requires detailed disclosures of reserve assets.
MiCA imposes usage caps on EMT in currencies, such as USDC and USDT, limiting them to 1 million daily transactions or €200 million in daily transaction value within the EU.
These measures could lead to wider adoption and integration into traditional financial systems.
But European crypto regulations introduce complexities that could stifle smaller market players due to increased operational costs and compliance constraints.
Tether, which has long been criticized for its lack of transparency and reserve management, has criticized MiCA. They “could not only make the job of a stablecoin issuer extremely complex, but also make European-licensed stablecoins extremely vulnerable and riskier to mine,” CEO Paolo Ardoino told crypto research portal The Block early June.
Tether has not yet obtained the EMI license. However, it is “developing a technology-based solution” “to meet the needs of the European market.”
The US crypto industry is fragmented compared to European regulations
The regulatory approach to cryptocurrencies remains fragmented across the Atlantic, with different states and federal agencies imposing varying rules. The United States has not yet implemented a comprehensive framework.
Discussions on the regulation of stablecoins and central bank digital currencies (CBDCs) are ongoing. This disparate regulatory environment creates uncertainty for crypto businesses operating in multiple jurisdictions, including Coinbase, Kraken, and Bitstamp.
The regulatory approach taken in the United States in 2023 has resulted in euro-dominated trading volumes increasing at a faster rate than the dollar.
Source: Kaiko Research, The State of the European Crypto Market, 2023
It is worth noting that the euro leads cryptocurrency trading against the dollar, since only 1% of transactions were carried out using stablecoins, compared to 90% in the United States.
Access to the European market
The opportunity for big crypto players is immense. The market size of European cryptocurrency exchanges is expected to reach $14.3 billion this year. It will reach 218.6 million users by next year,
Coinbase’s international operations, which include Europe, contributed approximately 17% of its total revenue in the first quarter of 2024. By aligning with MiCA, Coinbase can leverage its regulatory approach in Europe and potentially increase its share of regional revenues thanks to derivative products in Europe.
Coinbase’s strong foundation with USDC, Circle’s MiCA-compliant stablecoin, allows the company to benefit from the regulatory environment in Europe.
The world’s largest technology companies have been waiting for clearer regulations to integrate crypto. With MiCA, “they’re all hoping it will happen in the United States as well,” Armstrong said. “We’re optimistic about that.”
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