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How EU ‘complete chaos’ over stablecoin regulation risks delisting as MiCA deadline approaches – DL News
- A double definition of e-money token in MiCA has set alarm bells ringing for experts.
- The stablecoin laws go into effect on June 30th.
- New legislation could solve the problem.
There are just two months left before the long-awaited European Rules on Cryptocurrency Markets, or MiCA, come into force.
And the cryptocurrency industry and European legal experts are ringing alarm bells.
Experts fear that the regulations will be so onerous and confusing that some stablecoins will be driven out starting June 30, when the laws go into effect.
It will be a “complete mess,” said Victor Charpiat, a lawyer at Kramer Levin Naftalis & Frankel, a global law firm.
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Cryptocurrency Confusion
The problem lies in the double definition of the so-called electronic money tokens, or EMTs. These are stablecoins pegged to a currency, such as the euro or the dollar.
Two popular stablecoins in this category dominate the cryptocurrency markets. Tether USDT has a market value of $110 billion and Circle’s USDC has $33 billion, according to CoinGecko.
This confusion stems from “crypto platforms not understanding how they should handle EMTs and opposing interpretations coming from different national regulators,” Charpiat said DL News.
The worst-case scenario would be to resolve the matter at the European Court of Justice, he said.
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The term electronic money token is defined twice in the MiCA text, which became law almost a year ago. The first defines EMTs as a type of crypto asset.
The second definition implies that e-money tokens are equivalent to electronic money, a term used since 2000 to denote digital money.
Cancellations may occur if the rules are not clarified.
“Like many other cryptocurrency exchanges, we have mitigation plans in place to delist coins if issuers are not regulated by June 30,” a spokesperson for cryptocurrency exchange Bitstamp said DL News.
An industry letter to EU regulators and legislators seen by DL News warned that the current text could “lead to a significant decline in economic activity around EMTs in the EU”.
Chilling effect
Financial institutions that handle electronic money are subject to more onerous regulations for payment services, more so than cryptocurrency service providers.
The dual definition of MiCA could create “a chilling effect on the development of e-money tokens in Europe,” said Mark Foster, head of EU policy at the Crypto Council for Innovation.
“If the EU rules are so onerous that they cannot provide a sustainable and commercial business, companies will naturally look to other jurisdictions, which undermines the value of the EU regime,” he said. DL News.
Cryptocurrency advocates in Europe are rallying for short-term clarity from regulators and a long-term solution within the EU bill changing the rules for payment services, which lawmakers in Parliament European Parliament pushed forward with a vote on Tuesday.
Payment Services Regulation
The Payment Services Regulation, or PSR, bill was voted on in plenary to move to the next stage of negotiations.
In the text, the legislators he wrote: “It is important to avoid duplicate requirements [to] clearly define the cases in which e-money tokens should instead be subject to this Regulation.”
Another amendment to the bill states that “payment transactions used for the execution of trading and settlement services using electronic money tokens” – those defined as cryptographic assets – are excluded from the PSR.
This could potentially come as a relief to the industry.
Negotiations with finance ministers will continue after the European elections in June. And the text signals that the EMT issue will be addressed.
Three year gap
“The industry is encouraged that the Legislature has understood the importance of clarity for EMTs,” Foster said.
But this regulation, if it makes it through the rest of the negotiations between Parliament and EU Council finance ministers, will not come into force until at least 2027.
This leaves a gap of approximately three years between PSR and MiCA.
“We hope to have clarity before MiCA is implemented,” Foster said.
Otherwise, once the laws go into effect, crypto platforms may not know whether they need to comply with payment services laws or cryptocurrency laws to store and transfer EMTs.
Investors would have different tax implications on their EMT holdings and this would determine how they can use their EMT funds.
When cryptocurrency companies and investors engage with lawyers and regulators, they will reach opposite conclusions, Charpiat said.
This could lead to litigation. National regulators may give different interpretations to the financial companies that manage the EMTs they are supervising.
This was said by the European Banking Authority, responsible for implementing and supervising stablecoin laws DL News is “taking measures to promote convergence in the application of MiCA” together with the European Commission.
The European Commission, which first drafted MiCA, stated that “EMT issuers can only be electronic money institutions and credit institutions”.
They should be “authorised under the E-Money Directive or have a banking licence”, a spokesperson said.
Electronic money token issuers
“There is a dual regime that applies because an e-money token is at the same time a crypto asset and also e-money,” said Patrick Hansen, Circle’s senior director for EU strategy and policy, at a conference on Frankfurt in February.
For global stablecoin operators like Circle, which issue e-money tokens in other jurisdictions, including the United States, issuing such a stablecoin in the EU means dealing with “complex and challenging dual issuer constructs,” he said.
It is unclear for which activities – from commerce to payments – which definition would apply.
Circle has applied for an electronic money institution license in France.
Tether, which has been in regulatory crosshairs, is also working to resolve MiCA’s “complexities” over e-money definitions and EU requirements, a spokesperson said.
Tether is “working to consider the impact of these provisions.”
Jon Egilsson, president and co-founder of euro-backed stablecoin issuer Monerium, is more optimistic.
“Today we are MiCA compliant, this is not a problem,” Egilsson said. This is because Monerium has been a licensed electronic money institution since 2019. But this has come with a high regulatory cost that other companies will have to start facing once MiCA goes into effect.
“We have to be monitored, we have to report regularly – it is a high cost to operate,” he said. DL News.
Until now, “other players we compete with can operate without any license.”
Egilsson and others argue that the rules for payment services were not designed with blockchain technology in mind.
These laws are designed to protect the customer if an institution transfers funds on behalf of a customer, using a third party for settlement.
“In network 3, the transaction is the transaction,” he said. “This means that the blockchain network is the payment channel.”
Inbar Preiss is a regulatory correspondent based in Brussels. Contact her at inbar@dlnews.com.