How MiCAR Regulatory Gaps Could Favor Non-European Stablecoin Issuers

The Markets in Crypto-Assets Regulation (MiCAR), which began its first phase on June 30, 2024, marks a significant step towards regulating the European digital asset market. However, current regulatory gaps may inadvertently favor non-European stablecoin issuers, such as Tether, and could potentially undermine the stability of Europe’s banking sector.

MiCAR classifies stablecoins into two categories: e-money tokens (EMTs) and asset-referenced tokens (ARTs). While this regulation introduces stringent requirements for stablecoins, it may disadvantage European issuers compared to their non-European counterparts. “A comprehensive and unified regulatory approach is necessary to address these disparities and ensure a balanced playing field,” explains Gijs Op De Weegh, CEO and Founder of StablR, to Blockworks.

One key issue is the fungibility of stablecoins. Circle’s announcement that stablecoins issued by European entities are fungible with those from jurisdictions with less stringent regulations is problematic. “Fungibility implies replaceability by an identical item, but regulatory discrepancies make true fungibility challenging,” Op de Wegh points out.

The enforcement of transaction limits in the Eurozone—capped at 1 million transactions and 200 million euros per day—further complicates matters. Since stablecoins can be stored, traded, and lent globally, tracking which tokens fall under MiCAR’s jurisdiction is difficult. “Stablecoins are inherently borderless, making these limitations hard to enforce,” Gijs notes.

In addition to that, regulatory capital requirements vary significantly across jurisdictions. In Europe, stablecoins are required to maintain 2% capital, with significant stablecoins needing 3%, the strictest in the market. “The challenge of determining when a stablecoin becomes significant adds to the complexity of compliance,” he explains. The MiCAR requirement to aggregate data from multiple issuers further complicates this process.

Moreover, custody requirements also pose challenges. MiCAR mandates that 60% of fiat and fiat equivalents for significant stablecoins be held at European credit institutions. “This requirement becomes complicated with fungible stablecoins issued from different jurisdictions,” Gijs warns. Without proper safeguards, Europe may face spillover risks from non-European jurisdictions.

The failure of major US banks in March 2023, which led to significant de-pegging of stablecoins like USDC, highlights the risks involved. “A default by a non-European bank holding assets backing a MiCAR-licensed stablecoin could trigger a de-pegging event, destabilizing Europe’s digital asset ecosystem,” he explains.

Moreover, MiCAR’s stipulation that all EMT holders have a claim on the issuer complicates enforcement in a borderless blockchain environment. “The ability to redeem at par without redemption cost is not a feature in many other regimes, leading to potential discrimination against stablecoin holders from different jurisdictions."

To ensure fairness within the European digital asset ecosystem, it is crucial to adopt a unified regulatory framework that addresses these gaps. “Without a comprehensive approach, we risk creating an inequitable market landscape that could benefit non-European entities and destabilize the market,” Gijs concludes. Only through such measures can Europe safeguard its financial systems and maintain a level playing field for all stablecoin issuers.