EU Crypto Regulation Prompts Crypto Exchanges, Stablecoin Issuers Response

In response to MiCA, California-based exchange Coinbase COIN will delist unauthorized stablecoins that do not comply with MiCA.

The European Union (EU) has taken a significant step in regulating the cryptocurrency industry with the Markets in Crypto Assets (MiCA) regulation, which came into effect on June 30. This regulation aims to create a unified framework for digital asset markets throughout the EU.

One of the key aspects of MiCA is its focus on stablecoins, which are cryptocurrencies pegged to a fiat currency like the US dollar or euro. Stablecoin issuers are now required to obtain an Electronic Money Institution (EMI) license to operate within the EU.

This license entails stringent compliance requirements, including maintaining a minimum of 30% of their funds in bank deposits for stablecoins with a fixed reference to a fiat currency, known as E-money Tokens. For "significant" stablecoins, at least 60% of fiat reserves must be distributed across multiple institutions.

In response to MiCA, major cryptocurrency exchanges like Coinbase (NASDAQ:COIN) and Binance have adjusted their offerings to comply with the new regulations. Coinbase will reportedly delist unauthorized stablecoins that do not meet MiCA's requirements.

Binance, on the other hand, has stated that it will not immediately delist any unauthorized stablecoins on the spot but will limit their availability for European users.

Among the stablecoin issuers, PayPal (NASDAQ:PYPL) has obtained a Luxembourg EU banking license, enabling it to issue its own regulated stablecoin, PayPal USD (PYUSD).

Meanwhile, Circle, the issuer of USDC and EURC stablecoins, has secured an EMI license from France's banking regulator. USDC has outperformed USDT year-to-date by over 10%.

MiCA places a strong emphasis on consumer protection, requiring digital asset operators to obtain a license in an EEA member state to operate across the EU.

Stablecoin issuers must disclose detailed information about their reserve assets and adhere to liquidity, capital standards, and consumer protection measures.

For instance, stablecoins must be backed by a liquid reserve with a 1/1 ratio and partly by deposits.

Additionally, MiCA mandates the publication of white papers detailing potential risks and impacts for crypto-assets, along with detailed disclosures of reserve assets.

The regulation also imposes usage caps on foreign currency EMTs, such as USDC and USDT, limiting them to 1 million daily transactions or €200 million in daily transaction value within the EU.

While MiCA's measures could facilitate broader adoption and integration of crypto into traditional financial systems, the EU crypto regulation introduces complexities that may hinder smaller market players due to increased operational costs and compliance burdens.

Tether, the issuer of USDT stablecoin, has criticized MiCA, claiming that it "could not only render the job of a stablecoin issuer extremely complex but also make EU-licensed stablecoins extremely vulnerable and riskier to operate."

Tether has not yet secured the EMI license but "is developing a technology-based solution" "to serve the necessities of the European market."

In contrast to the EU's unified approach, the US regulatory landscape for cryptocurrencies remains fragmented, with different states and federal agencies imposing varying rules.

The US has yet to implement a comprehensive framework, with discussions around stablecoin regulation and central bank digital currencies (CBDCs) still ongoing. This disparate regulatory environment creates uncertainties for crypto businesses operating across jurisdictions.

However, the regulatory approach in 2023 has resulted in an increase in euro-dominated trading volumes at a faster pace than the dollar. Notably, the euro leads the dollar in cryptocurrency trading as only 1% of transactions were completed using stablecoins versus 90% in the US.

The market size of European cryptocurrency exchanges is set to grow to $14.3 billion this year and reach 218.6 million users by next year, presenting a significant opportunity for major crypto players.

Coinbase's international business, which includes Europe, contributed approximately 17% of its total revenue in Q1 2024. By aligning with MiCA, Coinbase can leverage its regulatory approach within Europe and potentially increase its regional revenue share through derivatives in Europe.

Coinbase’s strong foundation with USDC, Circle's MiCA-compliant stablecoin, positions the company to benefit from the regulatory environment in Europe.

The world's biggest tech companies have been waiting for regulatory clarity to integrate crypto. With MiCA, "they’re all hoping that it happens in the U.S. as well," Armstrong said. "We're bullish on this."

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