MICA´s impact on stablecoins
You may have missed it during the pandemic, but crypto currencies have exploded in popularity. Currently, the market cap of all stablecoins is approximetly 200 billion USD and shows no indication of decline. What, you ask, are stablecoins and why are the regulators eager to regulate them?
Perhaps, you have considered investing in crypto and while doing some basic investigation, you discovered that one of the main drawbacks is its inherinent volatility. This has a negative impact on crypto being viewed and used as a store of value or a means of payment. Stablecoins generally address this problem by being pegged to an underlying asset (usually a FIAT currency and in 1:1 proportion). In this way, stablecoins offer all the benefits of crypto such as speed and low costs while maintaning a stable value. This makes them ideal for crypto trading and online payments.
However, this optimum solution has a major practical requirement. This pegging to a FIAT currency is not something that investors can take on faith. Normally, savy investors require issuers of stablecoins to maintain reserves in their pegged currency. This means that for a coin pegged at 1 USD, there must, somewhere, a 1 USD bill to cover that coin. If not, the issuer of a stablecoin has a licence to print an unlimited amount of money.
In addition, do not forget another threat coming from big multinational tech companies. Namely, in June 2019, Facebook tried to build its own stablecoin – Libra. Libra was intented to be the means of payment in the Facebook ecosystem allowing Facebook users and partners to pay for their own goods and services in Libra. Since Facebook has more than 2 billion users, US and EU lawmakers ordered the project stopped until they could examine the possible implications. The very next month, Libra was cancelled.
That is exactly why stablecoins have not escaped the eye of regulators and why MiCA regulates stablecoins comprehensively. The EU intends to play a key role in addressing the potential risks arising from stablecoin issuance. In fact, two categories of crypto-assets covered by MiCA are different types of stablecoins. E-money tokens issued on the bassis of a single fiat currency, and asset-referenced tokens which are based on multiple fiat currencies or one or several commodities or one or several crypto-assets, or a combination hereof.
MiCA lays out requirements for both prospective and established stablecoin issuers. All stablecoin issuers are required to own and maintain capital funds equivalent to either EUR 350,000 or 2% of their total reserve assets – whichever is greater.
But not all stablecoin issuers are treated equal. MiCA also lays out additional requirements for what it categorizes as „significant issuers“, meaning any issuer in excess of one or several thresholds. This would include a market capitalization of at least 1 billion EUR, or records at least 500,000 transactions per day. Significant stablecoin issuers, which include major global stablecoins like Tether (USDT) and USDC, have a number of additional requirements to fulfill under MiCA, including maintaining capital funds equivalent to 3% of their reserve assets.
Taking into consideration Tether, which is the largest stablecoin by market capitalization (around 80 billion USD at the moment), it means that issuer of Tether must hold at least 2,4 billion EUR of its own funds. This is the same issuer of Tether, responsible for almost half of stablecoints in the ecosystem, which has already found itself in severe legal jeopardy in the US for allegedly misleading customers for almost 3 years by claiming that its stablecoins were backed by sufficient dollar reserves. The issuer of Tether agreed to pay fine of 41 million USD.
Obviously, there are numerous risks arising from the use of stablecoins. Thus, some oversight is clearly warranted. MiCA identifies main risks and threats to financial stability, monetary policy, and monetary sovereignty.
Undoubtedly, the future of stablecoints will be fascinating. Private issuers, state issuers and multijurisdictional regulators are faced with numerous questions and unlimited possibilities.