The MiCA Stablecoin Disruption: A Report

Introduction

The last time we touched up on MiCA, we discussed its implications on the market, along with all the other major regulatory steps around the world. Since then, quite a long time has passed and MiCA has been consolidated as a regulation in the European Union. On June 30th this year, another MiCA regulation went into effect, which has shaken up the world of stablecoins.

MiCA has set up a regulatory framework that targets E-Money Tokens, Asset-Referenced Tokens, and other crypto assets. Failing to comply with those regulations can force stablecoins to leave the European Union market. Already, some platforms have started updating stablecoin listings in the EU.

The two major stablecoins by market volume, USDC and USDT had differing reactions to the laws, as per Goodwin Law:

1. Circle (USDC/EURC)

• Circle applied for conditional CASP authorization with the French Securities Commission (AMF).

• On July 1st, Circle became the first global issuer of stablecoins to comply with the EU's MiCA framework by obtaining Electronic Money Institution (EMI) authorization from France's ACPR.

• With this EMI license, Circle's USDC and EURC are now issued in the EU in compliance with MiCA's regulatory requirements for stablecoins, effective June 30th.

2. Tether (USDT/EURT)

• Tether (USDT), needs EU registration to continue its operations.

• Tether expresses legitimate concerns about MiCA’s requirement to have 60% of fiat reserves stored in banks. Since it primarily operates in US Treasury Bills.

• Bitstamp has chosen to delist Euro Tether (EURT) at the moment due to Tether's lack of compliance with MiCA regulations.

In This report, we will explore various scenarios and try to anticipate how they may pan out for investors.

Stablecoins

USD Coin (USDC) is a fully-backed stablecoin issued by Circle and Coinbase through the Centre Consortium. It is pegged to the US dollar, ensuring stability and trust within the cryptocurrency ecosystem. Circle holds an equivalent US dollar in reserve for every USDC in circulation, assuring its value.

Tether (USDT) is a fully-backed stablecoin issued by Tether Limited. It is pegged to the US dollar. USDT fiat backing is primarily composed of U.S. Treasury bills, which make up a significant portion of Tether's assets. This structure provides assurance of its value and bolsters confidence among its users.

Before we go further, here’s a quick rundown about the various types of stablecoins, since this should better help us gauge the scenario. There are three main types of stablecoins prevalent, each with unique mechanisms to maintain their stability:

• Fiat-collateralized: Backed by a reserve of fiat currency like the US dollar or the euro. Examples include USDC and Tether (USDT). Their value is directly tied to traditional currencies held in reserve, making them straightforward and reliable.

• Crypto-collateralized: Backed by other cryptocurrencies. These stablecoins use crypto assets as collateral and often over-collateralize to account for volatility. An example is DAI, which backs its value with Ethereum and other cryptocurrencies.

• Algorithmic: Not backed by collateral. These stablecoins use algorithms and smart contracts to control supply and stabilize value. They adjust supply automatically based on market demand. Examples include TerraUSD (before its collapse) and Ampleforth.

The new regulations have outright banned algorithmic stablecoins and there are strict rules for the other asset-backed stablecoins. In this article, we shall put our focus on the more popular fiat-backed currencies.

MiCA Rules for Stablecoins

Markets in Crypto-Assets (MiCA) as we know was created with the purpose of creating a unifying and comprehensive framework for all countries of the EU. This was set out to bring clarity and structure to crypto operations. The regulation aimed at ensuring consumer protection, market integrity, and financial stability. With it, MiCA brings stringent obligations for crypto-asset service providers (CASPs), creates a definitive standard for Token Issuance and adds regulations for stablecoins. It also makes licensing easier for projects operating in the EU region.

As MiCA rules go live, the implications for stablecoins are significant. Here are the highlights:

• Proper Authorization: A National Competent Authority (NCA) within an EU country will conduct the authorization procedure. This involves proving sufficient capital reserves, transparency, and risk management. A detailed white paper, in the format prescribed by MiCA, is also necessary.

• Backing: The stablecoin must be backed by low-risk, liquid investments. These reserve assets must be fully segregated from the issuer’s own assets.

• Transparency: Regular reporting to the respective NCA about the status of assets is mandatory.

• Consumer Protection: Safeguarding consumer funds and setting up a clear system for information and support provision is necessary.

• Market Abuse Prevention: Stablecoin issuers must monitor and report suspicious activities. MiCA requires the implementation of measures to prevent insider trading and market manipulation, similar to those in traditional finance.

Circle Cements its EU Presence

American financial technology firm Circle has become the first MiCA-compliant issuer in the global crypto market. Circle operates USDC, the second-largest stablecoin by volume. Circle also issues EURC, a stablecoin pegged to the Euro 1:1.

The USDC-issuers have always sought regulation and clear rules regarding stablecoins, and co-founder Jeremy Allaire echoed this sentiment following this achievement.

Circle was able to accomplish this feat by receiving an E-Money Institution (EMI) license from Autorité de Contrôle Prudentiel et de Résolution (ACPR) - the French banking regulatory authority. As a result, Circle can now mint USDC and EURC in a MiCA-compliant manner. Additionally, Circle has established Circle Mint to offer businesses a chance to mint these volatility-avoiding tokens.

In doing so, Circle has now established deep roots in the European cryptocurrency market. Its adherence to local laws and local presence has created a clear path for electronic money transactions and usage. With other market competitors now out of the European market, Circle has cemented its position in the region. Circle’s proactive strategy and months-long regulatory efforts with French authorities paid off with the final receipt of rights to mint stablecoins.

Market Impact

USDC has long been the second-largest stablecoin, yet it has experienced higher growth rates for quite a long time. After the MiCA disruption, it is clear that the European market may have started a further positive run for USDC. Infact, this event may change the current balance between USDC and the current stablecoin market leader USDT.

Since the announcement, USDC has seen a significant increase in daily trade volume. Among the stablecoins compliant with MiCA, USDC, EURC, and EURCV have all experienced an uptick in volume. While MiCA-compliant stablecoins account for only 12% of the total volume, this number is consistently increasing. The impact of centralized exchanges (CEXes) and perpetual settlements has further contributed to this growth. The suspension from the European market however has negatively affected USDT, causing a minor depeg.

The impact extends beyond mere numbers. Europe accounts for 17.6% of global transaction volume and is the second-largest cryptocurrency economy in the world. It therefore wields significant leverage given its global influence. With its stringent regulations, Europe could attract more crypto businesses and institutional interest. Not wanting to fall behind, we can expect the US and UK to follow suit soon. This could lead to a ripple effect across the entire industry, with these regulations shaping the future of the decentralized economy. Many companies are still analyzing the MiCA regulation and exploring paths for compliance, and we hope to see its effects in the months to come.

Concerns Across the Industry

One key point garnering attention is that MiCA requires EMT/ART (the classification under which stablecoins fall) to have 30% of funds in banks. Larger stablecoins, with more “systemic importance,” must have 60% of their fiat reserves in multiple banks.

The banking systems, however, will not provide interest rates comparable to US Treasury Bills. USDC has a significant chunk of its current funds in T-Bills. Additionally, the competitor USDT by Tether also has most of its fiat backing in US T-Bills.

Concerns about bank backing are not without reason. USDC famously suffered a massive depeg owing to the failure of Silicon Valley Bank, leading to a momentary lack of access to $3.3 billion. USDC tipped below $0.88 at one point, losing its $1 peg.

Similar comparisons can be drawn to the current scenario. If a large sum of the fiat backing is compulsorily stored in banks, any failure of the European banking system can have far-reaching consequences for the crypto market as well, a sentiment echoed by Paolo Ardoino, CEO of Tether.

Therefore, concerns from the leading stablecoin are very real. In fact, USDT is also closely working with regulators on these risks, aiming for the ability to store all their reserves in treasury bills. This approach would effectively shield it from potential bank failures due to uninsured cash deposits. Often considered almost a digital dollar, USDT has a strong focus on emerging markets where communities use it as a store of value against the inflation of national currencies. Consequently, USDT has decided to tread carefully to maintain its stability and security during these shifting times.

At the time of writing, we received another update on these concerns. Just like we discussed above, the CEO of USDC, Jeremy Allaire, has come out with a statement highlighting that the 60% cash asset requirement could create a single point of failure and put excessive pressure on the banking system. Patrick Hansen, Circle’s EU Strategy and Policy Lead, and even the European Banking Authority itself agreed with these concerns.

It is possible that another revision will be made to the MiCA rules to address these major grievances. This could allow other providers to re-enter the EU market. However, for now, USDC continues to operate under the current MiCA rules by issuing separately in the US and EU to meet regulatory requirements in both regions.

Conclusion

Luganodes will be closely following the market movements as well as the impact that these regulations can have on our consumers and institutional investors. While regulation and greater acceptance of digital currency are always welcome, proper investigation into potential failures is also necessary. In this way, we hope to see a common consensus that prioritizes people’s interests.

About Luganodes

Luganodes is a world-class, Swiss-operated, non-custodial blockchain infrastructure provider that has rapidly gained recognition in the industry for offering institutional-grade services. It was born out of the Lugano Plan B Program, an initiative driven by Tether and the City of Lugano. Luganodes maintains an exceptional 99.9% uptime with round-the-clock monitoring by SRE experts. With support for 45+ PoS networks, it ranks among the top validators on Polygon, Polkadot, Sui, and Tron. Luganodes prioritizes security and compliance, holding the distinction of being one of the first staking providers to adhere to all SOC 2 Type II, GDPR, and ISO 27001 standards as well as offering Chainproof insurance to institutional clients.