When the world’s fourth-largest cryptocurrency exchange delists its leading stablecoin for an entire continent, it raises eyebrows.
But this may just be a harbinger of things to come.
Expect more disruptions as Europe’s path-breaking Markets in Crypto-Assets Regulation (MiCA) regulatory regime takes effect at the end of June.
Off-shore stablecoins, in particular, may face challenges. But in the long run, MiCA should provide a safer, stronger eco-system for stablecoin issuers and users, sources told Cointelegraph recently.
As reported, Seychelles-based crypto-exchange OKX delisted Tether (USDT) trading pairs for users in the European Economic Area (EEA) ahead of MiCA. “Moving forward, only EUR and USDC trading pairs will be accessible for spot trading,” said OKX in a customer support message.
A shifting landscape
Market observers were hardly shocked by the news. Christian Catalini, the founder of the Massachusetts Institute of Technology Cryptoeconomics Lab, said he was “not surprised at all by the delisting,” adding that “the stablecoin landscape will evolve substantially across the globe as new regulation is passed, and we will see entry by new players — many of which won’t be companies that started in crypto and are coming from traditional banking and fintech.”
Regarding the OKX news, Arvin Abraham, partner at United Kingdom-based law firm Goodwin Procter, expects more of the same. He tells Cointelegraph:
“Post-MiCA [i.e., after June 30], if a stablecoin is no longer compliant, we can expect exchanges to drop it from the exchange for European customers.”
Because none of the world’s largest stablecoins are European, it follows that in the EEA, at least, one could see “a significant shifting of the landscape following MiCA coming into effect,” suggested Abraham. Some of the current leaders may have to bow out if they won’t, or can’t, get compliant.
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“MiCA, with its stringent requirements for both e-money tokens and asset reference tokens” [i.e., two forms of stablecoins in the new MiCA lexicon] will undoubtedly impact stablecoin offerings in the European Union,” Jean-Baptiste Graftieaux, global CEO at France’s Bitstamp cryptocurrency exchange, told Cointelegraph, and “we are closely monitoring developments in this area.”
The challenge for stablecoin issuers is they will now need to be an EEA entity and authorized as an Electronic Money Institution firm in the EEA. “This is problematic for existing stablecoin issuances, and the timeline is now very short, with June 30, 2024, being the last date to meet the new regulatory requirements,” Graftieaux added.
A harder task for off-shore stablecoin issuers?
“For non-European [stablecoin] issuers, the requirement for the issuer to have an entity established and authorized in an EU member state is the most significant unique cost,” Abraham noted. But it isn’t just off-shore issuers who will face challenges.
“For all issuers, significant additional burdens come from the requirements to maintain 1:1 reserves to cover claims; provide permanent redemption rights to holders of tokens; and for stablecoins with a value exceeding 100 million euro to provide quarterly reporting to their EU home state regulator,” Abraham added.
Jon Helgi Elisson, co-founder and chairman of Monerium, a company issuing compliant on-chain fiat stablecoins in Europe, and former chairman of the supervisory board of the Central Bank of Iceland, told Cointelegraph that most stablecoins offered in Europe today are not compliant with existing electronic money rules — let alone those that will be implemented June 30 as a result of MiCA.
“The e-money directive has been in effect in Europe for more than 20 years,” Elisson said. “Why do you have a market of stablecoins where you have one set of companies that are compliant and one set of companies that are not compliant? That is not a fair thing.”
Still, he suggested that it could be “hugely expensive” for some stablecoin issuers to come into compliance. With MiCA, fiat-backed stablecoin issuers will not only have to maintain a 1:1 ratio of liquid reserves, but they will also have to segregate user’s funds, “meaning that the customer has a claim on the underlying funds,” not the company, said Elisson.
Compliance demands will be greater for the larger market-cap issuers. “In the current [pre-MiCA] regulation and law, there is no distinction between the size of issuers,” said Elisson.
The same rules apply to smaller and bigger issuers. However, MiCA distinguishes between “significant” issuers and “non-significant” issuers. “You have to put more of your own equity aside against potential losses if you are a ‘significant’ issuer,” Elisson explained.
Will there be more changes for off-shore issuers?
“The impact of the regulation may result in some challenges for those operating in international markets,” said Graftieaux. “For example, it could result in increased compliance costs, barriers to market entry, and potential conflicts with other jurisdictions’ regulatory frameworks, resulting in policy fragmentation.”
Abraham foresees “a significant short-term disruptive effect on the market, as Tether is today the most popular stablecoin globally.”
However, over a longer time frame, “other stablecoins would fill the void, and the ecosystem would arguably be safer as these coins would be compliant with MiCA’s strict consumer protection and prudential safeguards.”
Crypto exchanges might have to adapt, too. “Some exchanges require stablecoins as an intermediate form of exchange before fiat can be used to purchase crypto or to effect a trade between two crypto assets,” said Abraham. Those stablecoins may not be available to them soon, at least for European customers.
Setting an example for crypto markets
Still, Graftieaux emphasized the long-term benefits for investors and markets generally. “With a focus on market integrity and investor protection, these regulatory standards set an example for other markets, which, if followed, will only increase investor confidence.”
The MiCA framework has already had an impact in the U.K., Graftieaux added, where the government’s commitment to digital assets has been widely seen “as a clear strategic move to lead the international regulatory stage alongside the EU.”
Graftieaux also takes issue with those who claim that MiCA could thwart crypto and blockchain innovation in the EU countries. “While innovation plays a crucial role in the industry, the importance of market stability cannot be overstated.”
Ultimately, the new framework “recognizes the revolutionary ability of blockchain technology while also finding a balance in offering legal clarity and certainty,” he continued. Moreover, “This harmonization encourages cross-border innovation through the seamless collaboration enabled between EU states.” Graftieaux told Cointelegraph:
“This cross-pollination of ideas will continue to foster technological innovation – just under a more robust set of regulations.”
Indeed, some on the continent see MiCA offering an opening for a new generation of stablecoin providers.
“We cannot predict market reactions, but one thing is sure: MiCA is a real opportunity for Europe and euro stablecoins,” Jean-Marc Stenger, CEO at France’s Societe Generale – Forge, told Cointelegraph, adding:
“The European market is dynamic, with a large, mature and sophisticated investor base. All the conditions are in place to allow a move toward rebalancing euro versus dollar stablecoins in the long term.”
In sum, with their focus on market integrity and investor protection, the new EU crypto regulations could set an example for other markets — after some short-term pain, of course. The stablecoin sector might also see some new entrants to challenge the dominance of dollar-backed stablecoins.
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“While MiCA is far from perfect, it provides a starting point for more robust stablecoin regulation. It’s also way better than the current situation in the U.S., where there isn’t any regulatory clarity and new rules are needed to deliver safe and sound stablecoins to consumers and businesses,” said Catalini, adding:
“Once there is clarity, we’ll finally know which stablecoins are here to stay and which ones can actually solve real consumer and business needs at scale.”