On 30 June 2024, the European Union's Markets in Crypto-Assets Regulation (MiCA) officially brought its stablecoin regime into effect across the EU. This milestone legislation, which aims to regulate the crypto-asset market with a focus on stablecoins, sets an important global precedent. Circle, the issuer of USDC, will be the first stablecoin issuer to obtain full approval under the regime.
For Australia, a country steadily growing its footprint in the digital assets space, there are valuable lessons to be drawn from MiCA's framework and its implications for stablecoin regulation.
The Significance of Stablecoins in the Crypto Market
The dominance of stablecoins within the crypto-asset market has been closely watched. In 2023 alone, a stablecoins accounted for 60% of the USD$10 trillion transaction volume on-chain. This is primarily driven by retail users, with 91% of daily transfers being under USD $10,000. Interestingly, stablecoins are now being held for longer durations, averaging 40 weeks, indicating user confidence in them as a store of value and a strategic holding asset, especially during market downturns.
Figure 1: USD value transferred on-chain per month
Stablecoins are touted as the "future" of money, and data indicates that stablecoins are used the most for everyday transactions and often have a short holding time.
Figure 2: Average holding period (measured in weeks)
MiCA’s Stablecoin Regime
MiCA's categorises three main types of crypto-assets:
Asset-Referenced Tokens (ARTs): these tokens maintain a "stable" value by referencing assets such as gold, crypto-assets, or a basket of currencies.
E-Money Tokens (EMTs): these tokens maintain stable value by referencing a sovereign currency.
Other Tokens: includes major cryptocurrencies like BTC and ETH, with their specific regulatory obligations commencing on 30 December 2024.
Issuers of both ARTs and EMTs under MiCA must adhere to stringent regulatory requirements, including the submission of a detailed whitepaper to regulators. This whitepaper must cover the issuer's information, token specifics, reserve asset management, operational mechanics, and associated risks, ensuring transparency and accountability.
It is worth noting that MiCA excludes from its scope of operation tokens that are already subject to other regulatory frameworks, such as tokenised financial assets (such as tokenised shares, bonds, or derivatives).
EMTs vs. ARTs: Key Differences
The distinction between EMTs and ARTs is fundamental, explained by Chainalysis as follows:
E-Money Tokens (EMTs)
Issuable only by authorized e-money institutions and credit institutions.
Holders have a direct claim for redemption at par value at any time.
Considered funds, usable as a means of payment, and subject to the E-money Directive 2 (EMD 2) and Payment Services Directive 2 (PSD 2).
Asset-Referenced Tokens (ARTs)
Regarded solely as a means of exchange, not payment.
Holders can redeem tokens for fiat equivalent to the market value of the referenced assets.
Issuers must provide public disclosures about reserve assets and undergo mandatory audits every six months.
Reporting and Issuance Restrictions
MiCA imposes detailed reporting requirements on ARTs and non-EU currency denominated EMTs, especially for issuers with global issuance values exceeding EUR 100 million. These requirements include comprehensive details on underlying assets, transaction volumes, and holder demographics. Additionally, MiCA sets strict issuance restrictions to prevent excessive market dominance and ensure financial stability.
However, despite its thorough framework, the Chainalysis report highlights several challenges that the MiCA regime will face:
National implementation laws: first, the MiCA requires national laws to define its own implementation and enforcement details. As of the date of writing, approximately half of the EU member states have passed necessary laws and regulations.
Practical implementation: second, there is uncertainty regarding how MiCA’s provisions will be interpreted and applied by firms and regulators across the EU, particularly concerning non-MiCA authorised stablecoins post-30 June 2024.
Dual classification of EMTs: finally, EMTs are classified as both e-money and crypto-assets, creating potential regulatory confusion for "Crypto Asset Service Providers" in the EU (CASPs).
Lessons for Australia
As Australia continues to develop its regulatory approach to crypto-assets, EU's MiCA regime offers several insights and positions of precedent:
Comprehensive regulatory framework: MiCA's detailed approach to regulating stablecoins highlights the importance of a comprehensive framework which addresses the technological aspects of stablecoin issuance, redemption, reserve management, and transaction transparency so as to reach technology neutral outcomes.
Transparency and accountability: the requirement for detailed whitepapers and regular reporting ensures that issuers are transparent and accountable, a practice that could enhance trust within the Australian market if adopted here.
To-the-point definitions: not wanting to follow confused footsteps, MiCA’s challenges regarding the classification of EMTs and ARTs highlights the necessity for clear and unambiguous definitions within any regulatory framework to avoid confusion and ensure compliance. Regulators should consider any overlap that may be created when legislating crypto-asset specific laws in Australia, with the creation of bespoke laws enabling the technology being preferable.
Australia should be agile and adaptive: the evolving nature of the blockchain ecosystem demands an agile and adaptive regulatory approach that can provide clarity on emerging issues. The ongoing refinements to the application of the MiCA regime by the European Banking Authority and the European Securities and Markets Authority are maintenance which will need in our upcoming legislation.
Conclusion
MiCA’s stablecoin regime sets a global benchmark for crypt-asset regulation. For Australia, the adoption of a similar comprehensive and transparent regulatory framework could foster innovation, enhance consumer protection, and ensure the stability of the financial system.
With the MiCA regime as a guiding star (albeit non-perfect), Australia has the opportunity to learn from MiCA’s implementation, addressing its challenges and building a robust regulatory environment that supports sustainable growth and innovation in the crypto market.
By Luke Higgins and Michael Bacina
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