In-depth Analysis and Latest Amendments of the EU's MiCA Regulation on Stablecoin Usage Restrictions
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In-depth Analysis and Latest Amendments of the EU's MiCA Regulation on Stablecoin Usage Restrictions
The restrictions in the EU's Markets in Crypto-Assets Regulation (MiCAR) primarily target payments for everyday goods and services, not cryptocurrency trading or investment.
Navigating Web3 tides with focused insightsAuthor: Aiying Aiying
Recently, Aiying Aiying has noticed some news reports expressing concerns about the stablecoin restrictions in the EU's Markets in Crypto-Assets Regulation (MiCAR). The stablecoin-related regulations took effect at the end of June and do include strict limitations—once thresholds are reached, stablecoins must halt issuance. However, these restrictions primarily target payments for everyday goods and services, not cryptocurrency trading or investment activities.
1. Specific Rules on Stablecoin Usage
The EU’s position is clear: using stablecoins to buy cryptocurrencies or engage in decentralized finance (DeFi) activities is fully permitted. However, if you want to use stablecoins to purchase coffee or pay rent, you must use euro-based (or other EU currency) stablecoins. These restrictions are mainly designed to protect monetary sovereignty. This was detailed in a previous article by Aiying Aiying titled “Comprehensive Analysis of Europe’s MiCA Legislation: In-depth Impacts on Web3, DeFi, Stablecoins, and ICO Projects”:
The EU’s Markets in Crypto-Assets Regulation (MiCAR) establishes detailed rules and restrictions on stablecoin usage. The key provisions are as follows:
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Lenient Rules for Cryptocurrency and DeFi Use: MiCAR allows the use of stablecoins for cryptocurrency trading and decentralized finance (DeFi) without special restrictions. This means users can freely use stablecoins to purchase digital assets or participate in DeFi protocols.
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Strict Limits on Payments for Goods and Services: When stablecoins are used to pay for daily goods and services (e.g., buying coffee or paying rent), only euro-based (or other EU currency) stablecoins are permitted. These measures aim to safeguard the EU’s monetary sovereignty and prevent foreign-currency stablecoins from undermining the euro’s dominance.
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Specific Restrictions on Foreign-Currency Stablecoins: Foreign electronic money tokens (EMTs) and asset-referenced tokens (ARTs) face strict limits in real-world transactions. For instance, issuance must stop when daily usage within a single currency area exceeds one million transactions or 200 million euros in value. These rules are designed to prevent widespread adoption of foreign-currency stablecoins that could threaten the stability of the euro.
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EBA Concessions and Amendments: To ensure effective implementation, the European Banking Authority (EBA) made certain adjustments in the final version. For example, reporting requirements were waived for transactions between non-custodial wallets, reducing compliance burdens for crypto firms and freelancers. Additionally, both the EBA and the European Securities and Markets Authority (ESMA) will oversee enforcement of these rules.
Therefore, there are no restrictions on euro-based or other EU-currency electronic money-style stablecoins, but foreign electronic money tokens (EMTs) and asset-referenced tokens (ARTs) are subject to restrictions. For example, Facebook’s Libra/Diem project was an ART-type stablecoin pegged to a basket of currencies, commodities, or other assets. Aiying Aiying finds this understandable, because if foreign-currency stablecoins (such as USD-backed stablecoins) become widely adopted in the EU, the region’s financial system could be significantly influenced by external monetary policies and economic conditions. For instance, changes in U.S. monetary policy could transmit through stablecoin channels and impact economic and financial stability within the EU.
2. Analysis of Threshold Scenarios
Under MiCAR, if a foreign electronic money token (EMT) or asset-referenced token (ART) exceeds one million daily transactions or 200 million euros in transaction volume within a single currency area, its issuance must be suspended.
1. Understanding the Threshold
To better understand this threshold, consider the transaction volumes of major stablecoins today. For example, Tether (USDT) had daily trading volumes between $15 billion and $67 billion in June 2023. However, it’s important to note that the vast majority of these transactions are for cryptocurrency trading, not real-world payments. Therefore, such crypto trades are not counted toward MiCAR’s 200-million-euro limit, which applies exclusively to real-world payments within the EU.
2. Transactions Excluded from the Threshold
The final regulatory draft excludes several types of transactions from the threshold calculation, including:
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Transactions where one party is located outside the EU
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Transactions related to investments (not limited to crypto investments, but any form of investment)
These exclusions clarify that MiCAR’s primary objective is to control the use of stablecoins for everyday payments within the EU, rather than restricting their global financial or investment applications.
3. Exchange Means for Asset-Referenced Tokens (ARTs)
Within the context of MiCAR, “exchange means” refers to how asset-referenced tokens (ARTs) are used across various transaction types. The EBA has provided clear guidance on which transactions should be included in the total count and value of ART transactions, and which should not.
Transaction Types Not Counted as “Exchange Means” – The EBA explicitly states the following should not be included in the total number and value of ART transactions:
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Exchanges of funds or other crypto-assets with the issuer or a crypto-asset service provider (CASP): Direct exchanges involving the issuer or CASP are excluded from “exchange means” calculations.
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Use of ARTs as collateral in financial instrument transactions: When ARTs are used as collateral or security in financial transactions, these uses are not counted.
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Settlement of derivative contracts using ARTs: Transactions involving the settlement of derivatives with ARTs are also excluded from “exchange means”.
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Other transactions where the issuer has reasonable grounds to believe the purpose is not payment for goods or services: If the issuer can reasonably demonstrate that a transaction is not intended for purchasing goods or services, it is not included.
These rules ensure that the thresholds do not hinder market activities related to real-world asset tokenization. The preamble to MiCAR also discusses transactions involving stablecoins used as intermediary tools for payments, such as retail payments processed via Visa and Mastercard cards issued by crypto exchanges.
4. EBA Adjustments and Concessions
The European Banking Authority (EBA) conducted consultations on MiCAR’s implementing rules and published a summary of responses. Below is a detailed explanation:
EBA Concessions and Adjustments
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Data Reporting Requirements: To assess whether stablecoins exceed MiCAR thresholds, the EBA requires issuers to submit quarterly reports on transaction volume and value, enabling regulators to monitor market activity effectively.
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Reporting of Off-Chain Transactions: MiCAR mandates that crypto-asset service providers (CASPs) provide data—including off-chain transaction records—to stablecoin issuers. This ensures that even exchange-based trades not settled on-chain are included in the overall transaction count and value.
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Transactions Between Non-Custodial Wallets: A key concession by the EBA is the exemption from reporting transactions between non-custodial wallets. Non-custodial wallets are crypto wallets where users manage their own private keys without relying on third parties. This reduces regulatory burden for individuals and small businesses. For example, when crypto companies pay employees or freelancers in stablecoins, technically this constitutes a payment for goods or services. However, since both parties use non-custodial wallets, such transactions are not counted toward the 200-million-euro daily threshold.
Despite the EBA’s relaxation on reporting non-custodial wallet transactions, this does not mean all such transactions can bypass reporting obligations. This is because:
1. Limited Scope of Exemption:
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The EBA’s exemption applies only to transactions where both parties use non-custodial wallets. If either party uses a custodial wallet, reporting remains mandatory.
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Transactions involving custodial wallets or centralized platforms are still subject to reporting requirements.
2. Oversight of Large Transactions:
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While small peer-to-peer transactions may avoid reporting via non-custodial wallets, regulators may apply additional scrutiny to large-value transactions to prevent regulatory circumvention.
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For example, the EBA and other authorities may closely monitor exchanges and major market participants to ensure compliance.
3. Technical and Legal Safeguards:
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Regulators can employ technical tools to trace large or suspicious transactions, even those conducted through non-custodial wallets.
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Legal frameworks may also evolve to close potential loopholes, ensuring regulatory effectiveness and market fairness.
4. Practical Limitations:
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For many businesses and users, relying solely on non-custodial wallets is impractical. While they offer greater autonomy and privacy, they require advanced technical knowledge and strong security practices, which can be challenging for average users and small enterprises.
In summary, while the EBA’s concession reduces compliance burdens for certain small-scale and personal transactions, completely bypassing reporting obligations is neither feasible nor realistic. Regulators retain multiple tools and mechanisms to ensure market transparency and compliance.
Through a detailed analysis of the EU’s Markets in Crypto-Assets Regulation (MiCAR) and the European Banking Authority’s (EBA) implementing adjustments, it becomes evident that MiCAR seeks to strike a balance between innovation and regulation. Its flexibility and adaptability offer valuable lessons for other jurisdictions.
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