How new EU law can affect stablecoins

The year 2022 saw not only drastic dips in leading cryptocurrencies and financial markets in general but also major legislative frameworks for crypto in prominent jurisdictions. And while the “crypto bill,” co-sponsored by United States senators Cynthia Lummis and Kirsten Gillibrand, still has a long way to go, its European counterpart, the Markets in Crypto-Assets (MiCA), had finally made it through Tripartite negotiations. 

On June 30, Stefan Berger, European Parliament member and rapporteur for the MiCA regulation, revealed that a “balanced” deal had been struck, which has made the European Union the first continent with crypto-asset regulation. Is the deal really that “balanced,” and how could it affect crypto at large and some of its most important sectors in particular?

No direct ban, but tighter scrutiny

The industry met the latest MiCA draft with a mixed response — the cautious optimism of some experts was counterweighted by the diagnosis of “unworkability” on Twitter. While the package dropped one of its most alarming sections, a de facto prohibition of the proof-of-work (PoW) mining, it still contains a number of controversial guidelines, especially regarding stablecoins. 

Ironically, in its assessment of the risks posed by stablecoins to the economic system, the European Commission has chosen a combination of “moderate” options, reserving from the outright ban, which is labeled in the document as Option 3:

“Option 3 would not be consistent with the objectives set at the EU level to promote innovation in the financial sector. Furthermore, Option 3 could leave some financial stability risks unaddressed, should EU consumers widely use ‘stablecoins’ issued in third countries.”

The chosen approach qualifies stablecoins as a close analog of the EU’s definition of “e-money” but doesn’t see the existing Electronic Money and Payment Services directives as fit for addressing the issue. Hence, it suggests a set of new “more stringent” guidelines. 

The most outstanding requirement to the issuers of “asset-referenced tokens” is 2% of the average amount of the reserve assets, which would be obligatory for issuers to store in their funds separately from reserves. That would make Tether, which claims to have over $70 billion in reserves, hold a separate $1.4 billion to comply with the requirement. With Circle’s amount of reserves ($55 billion), that number will stand at $1.1 billion.

Another benchmark that caused…