Stablecoins play a crucial role in the crypto market, maintaining its stability and liquidity. These tokens pegged to a (more or less) stable asset, most often the dollar, act as a bridge between the fiat and the crypto worlds. Dollar-pegged stablecoins form the most popular trading pairs for various cryptoassets, accounting for almost 60% of the overall trading volumes.

Until recently, stablecoins were widely regarded as just another type of cryptoasset, mostly without specific regulation in major jurisdictions. However, since July 1, 2024, the European Union has enacted a new set of rules that have fundamentally disrupted the stablecoins market in the region.

As part of the famous MiCA regulation, these new rules impact all market players and must be taken into consideration. Here are the key points that stablecoin users should know.

E-Money-Tokens under MiCA

The MiCA regulation distinguishes two types of stablecoins: EMT and ART.

Dollar-, euro-, or other fiat-pegged stablecoins are now defined as E-Money Tokens (EMT). Their issuers are required to hold 30% of their reserves in the EU banks and comply with numerous strict investor-protection rules.

This provision faced widespread criticism in the crypto space for making it extremely difficult for small and medium-sized firms to issue stablecoins. The rulemakers were accused of favoring large financial companies over startups, with some fearing that the entire stablecoin market in the EU would be monopolized by banks.

However, the American company Circle, the issuer of USDC and EURC, managed to obtain an EMT license, as per the company’s announcement on Monday. This achievement makes Circle the only global stablecoin currently available in the EU.

Circle’s biggest competitor, the current market leader Tether, could not replicate this success. The company saw its token USDT delisted from major custodial platforms, such as Bitstamp, Uphold, Binance (tokens available in sell-only mode)… Smaller stablecoins, including decentralized ones like DAI faced similar consequences.

Asset-Referenced Tokens under MiCA

Stablecoins pegged to multiple currencies—whether fiat or crypto—or physical assets like gold (PAX Gold) are now classified as Asset-Referenced Tokens (ART). While ART issuers also need a license, the regulatory requirements are significantly less stringent.

However, with fewer requirements come fewer possibilities. ARTs referencing EU currencies will face no usage limits but those pegged to non-EU currencies and/or other assets will have their usage capped at €200 million or 1 million transactions per day.

These numbers are tiny compared to the current $50 billion of daily stablecoin trading volume, which means that truly popular stablecoins can only be EMTs.

Ban on paying interest

Stricter rules for stablecoins issuers are not the extent of MiCA’s surprises for the European crypto markets. Issuers and crypto asset service providers (CASPs) are prohibited from paying interest on both EMTs and ARTs – and this could have a profound impact on the whole space.

A number of centralized exchanges, like Kraken, and lending-borrowing companies, like Nexo, currently allow users earn interest on their stablecoins. In the EU, they are qualified as CASPs and due to their centralized nature will be obliged to comply with this restriction, effectively killing a part of their business.

In decentralized finance, it could be more difficult to enforce such rules, the absence of CASPs being the key issue. However, the developer teams could be demanded to ban EU-based IPs from accessing their web interfaces. Users will still be able to use the underlying protocol directly on the blockchain, but few possess the skills to do so, and such a rule would seriously hinder DeFi development in the EU.

Both these perspectives pose risks to the European crypto space, which is already lagging markedly behind the US. The sector’s lobbyists and activists are trying to elucidate the interests-paying issue with the regulators. Some lawyers hope that DeFi could be spared because it is not explicitly targeted by MiCA, while others elaborate workaround schemes using internal tokens not considered EMT or ART.

We should have a clearer picture by December 30, 2024, when the MiCA regulation will apply to CASPs.

Regulation presents both opportunities and threats for emerging technologies, and cryptoassets are no exception. With USDC now classified as e-money, grassroot adoption of this stablecoin could see a significant boost. However, EU regulators must find common ground with the representatives of crypto businesses to avoid sidelining the whole region from the future of finance.