Written by: Liu Honglin, founder of Shanghai Mankiw LLP;
Bai Zhen, head of the Hong Kong office of Shanghai Mankiw LLP;
Song Kewei, Paralegal at Shanghai Mankiw LLP
According to DefiLlama data, "the total market value of stablecoins has increased by 2.46% in the past week and is now reported at US$182.489 billion. Among them, the total market value of USDT has increased by 0.07% and is now reported at US$114.518 billion, with a market share of 69.82%." The issuance of stablecoins has become an important growth point in the cryptocurrency market.
The European Union (Markets in Crypto-Assets Act) (MiCA) is "one of the most comprehensive digital asset regulatory frameworks to date". Since the Act came into effect, Coinbase has announced that it will remove USDT for European users by the end of the year, and other exchanges have also taken related actions. This article will sort out MiCA's regulatory framework for EU stablecoin issuers and provide compliance references for companies and individuals entering the EU crypto market.
In Mankiw Blockchain, we have already had a basic introduction to MiCA (see: Interpretation of the EU MiCA Act, how can virtual currency custody services comply with the law? | Mankiw Web3 Legal Education).
It is worth noting that due to space limitations, we cannot cover all compliance provisions in the Act. Instead, we select important parts and conduct preliminary explanation and analysis based on the literal meaning of the provisions. Such explanation cannot fully reflect the entire content of the regulations and is for readers' reference only.
1. What is a stablecoin? Definition and classification of MiCA
Stablecoins are cryptocurrencies whose value is pegged to assets such as fiat currencies, commodities, and cryptocurrencies. They are designed to take advantage of the advantages of cryptocurrencies while minimizing price volatility.
Currently, in the EU's regulatory framework (Markets in Crypto-Assets regulation, MiCA), stablecoins are mainly divided into Electronic Money Tokens (EMTs) and Asset-Referenced Tokens (ARTs).
EMTs refer to currencies that maintain a stable value by being pegged to an official currency. EMTs are very much like the incarnation of real-world fiat currencies in the Web3 field, and can be likened to CBDCs (central bank digital currencies) that can be issued by non-state agencies:
‘Electronic money token’ or ‘e-money token’ means a type of crypto-asset that purports to maintain a stable value by referencing the value of one official currency.
ARTs, like EMTs, aims to maintain stable value, but it does so in a different way: it does so by pegging to multiple assets, which may include multiple currencies, rights, etc.:
‘Asset-referenced token’ means a type of crypto-asset that is not an electronic money token and that purports to maintain a stable value by referencing another value or right or a combination thereof, including one or more official currencies.
This structure theoretically disperses risks, but due to the diversification of underlying assets, it requires relatively stricter supervision. Compared with traditional fiat currencies, which are pegged to gold or backed by government credit, ARTs adopt a similar "portfolio" approach, which is more flexible. It can disperse risks through multiple configurations of underlying assets, or choose a certain asset to maintain stability. It can be said that ARTs provide more options for the design and innovation of stablecoins.
2. Overview of key regulatory points for stablecoin issuers
The main content of the MiCA Act is the various issuance and trading rules for the two stablecoins, ARTs and EMTs. Among them, Articles 16 to 47 (a total of 31 articles) are regulations for ARTs, and Articles 48 to 58 (a total of 10 articles) are regulations for EMTs. MiCA's regulations are more detailed for ARTs, a more diversified stablecoin. For the sake of simplicity, we will summarize the key points based on ARTs. Among them, if ARTs or EMTs are emphasized separately, we will reflect it in the name. If it only refers to "stablecoins", both ARTs and EMTs are included. According to the provisions of each chapter of MiCA, there are four more important compliance points, which are:
Authorisation to offer asset-referenced tokens to the public and to seek their admission to trading
Obligations of issuers of asset-referenced tokens
Regulatory reserves of stablecoin issuers (Reserve of assets)
Identification of “significant” stablecoins (Significant asset-referenced tokens)
3. Seeking authorization for the public issuance and trading of ARTs
Qualifications
In relation to the issuance of ARTs, a person may not publicly offer ARTs in the EU, or seek to be admitted to trading, unless that person is authorised as an issuer of ARTs and:
a) legal persons established in the Union and authorised by the competent authorities of their Member States in accordance with Article 21 or other undertakings which have been approved by legal procedure; and
b) Credit institutions complying with Article 17.
Crypto Asset White Paper
The crypto asset white paper for stablecoins (EMTs/ARTs) should contain all of the following information:
Information about the issuer of the e-money token/asset-referenced tokens
Information about the e-money token/asset-referenced tokens
Information about the offer to the public of the e-money token/asset-referenced tokens or its admission to trading
information on the rights and obligations attached to the e-money token/asset-referenced tokens;
Information on the underlying technology
Information on the risks
Information on the reserve of assets
Information on the principal adverse impacts on the climate and other environment-related adverse impacts of the consensus mechanism used to issue the e-money token/asset-referenced tokens
The provisions of ARTs and EMTs overlap in terms of items 1-6 and item 8. However, ARTs have provisions for information on the reserve of assets, but EMTs do not. This shows that MiCA has relatively higher requirements for the asset reserve of ARTs cryptocurrencies.
In addition, stablecoin issuers should publish the approved crypto asset white paper on their website and disclose it on the website continuously as long as anyone holds the cryptocurrency.
Finally, stablecoin issuers may be held legally liable if the white paper is incomplete, unfair, unclear, or misleading.
To sum up, the disclosure of cryptocurrency white papers is crucial to protecting investors' right to know. Stablecoin issuers should pay special attention to the completeness and accuracy of information disclosure to avoid unnecessary regulatory risks.
IV. Obligations of Stablecoin Issuers
After passing the first stage and obtaining authorization, the issuer obtains access to issue stablecoins in the EU, but this does not mean that everything is fine and the issuer can sit back and relax. The MiCA Act provides for the obligations of issuers of asset-referenced tokens as follows:
Obligation to act honestly, fairly and professionally in the best interest of the holders of asset-referenced tokens: This obligation is mainly a principle-based guideline. Although abstract, it provides guidance for the subjective purpose of the issuer's actions.
Marketing communications: Any marketing communications related to stablecoin transactions should be clear and consistent with crypto assets. MiCA has very strict requirements for the issuance and presentation of stablecoins, and tries to avoid inflammatory and tempting statements to control speculation risks from the source.
Ongoing disclosure (Ongoing information to holders of asset-referenced tokens): Stablecoin issuers shall disclose information at least once a month. Disclosure of stablecoin issuance is not a one-time event, but an ongoing one. Issuers must ensure that issuance information can be continuously known to regulators, investors and other stakeholders.
Complaints-handling procedures: Stablecoin issuers should establish and maintain effective and transparent procedures to handle complaints received promptly, fairly and consistently. Stablecoin issuers should establish a comprehensive complaint handling and feedback mechanism internally to focus on resolving conflicts within the platform.
Identification, prevention, management and disclosure of conflicts of interest: Stablecoin issuers should implement and maintain effective policies and procedures to identify, prevent, manage and disclose conflicts of interest among themselves.
Governance arrangements: Stablecoin issuers should have sound governance arrangements, including a clear organizational structure, clear, transparent and consistent lines of responsibility, effective procedures for determining, managing, monitoring and reporting on the risks they face or may face, and appropriate internal control mechanisms, including sound administrative and accounting procedures.
Own funds requirements: Stablecoin issuers should have funds equivalent to the following maximum amounts at all times: (a) 350,000 euros; (b) 2% of the average amount of asset reserves referred to in Article 36; (c) one-quarter of the fixed management expenses in the previous year. Stablecoin issuers also need to have a certain amount of "deposit reserves" to cope with the risks that may exist in the issuance and trading of virtual currencies.
From the above regulations, it can be seen that MiCA’s obligations on stablecoin issuers are relatively comprehensive, especially in terms of information disclosure (continuous disclosure) and transmission (marketing communication). It can be seen that MiCA aims to prevent risks such as fraud and speculation from the source and protect the interests of stablecoin holders; on the other hand, these regulations also put forward higher compliance requirements for stablecoin issuers.
5. Asset reserves of stablecoin issuers
From the obligations of stablecoin issuers, we can see that MiCA has high requirements for the issuer's own funds. Here MiCA lists a separate chapter to describe the asset reserves of stablecoin issuers. The key points are excerpted as follows:
Obligation to have a reserve of assets, and composition and management of such reserve of assets: Stablecoin issuers should maintain asset reserves at "all times". It is particularly noteworthy that asset reserves should be legally isolated from the issuer's assets, so as to ensure that once the stablecoin issuer is unable to repay its own debts, the relevant creditors have no right to recourse to asset reserves. This provision requires stablecoin issuers to achieve the purpose of asset isolation. In order to ensure the reduction of this risk, issuers need to carefully consider the legal structure of their assets.
Custody of reserve assets: Stablecoin issuers should establish and maintain a policy for the custody of reserve assets to avoid the risk of excessive concentration of reserve assets.
Investment of the reserve of assets: If a stablecoin issuer wants to invest part of its reserve assets, it can only invest these assets in highly liquid financial instruments with minimal market risk, credit risk, and concentration risk. Avoid taking unnecessary risks on reserve assets for higher returns.
Right of redemption: Stablecoin holders should have the right to redeem reserve assets at any time. This holder's right requires the issuer to formulate and improve the policy of this permanent redemption right.
Prohibition of granting interest: Issuers of EMTs are prohibited from granting interest related to the EMTs, which includes compensation, discounts, etc.
Special Provisions for EMTs
In terms of the issuance and redemption of EMTs, MiCA stipulates that EMTs issuers should issue them at par value after receiving funds, which is not reflected in the regulation of ARTs.
VI. Identification of Important Stablecoins
In addition to general stablecoins, MiCA also stipulates "important" stablecoins. Stablecoin issuers should pay special attention to the additional regulatory requirements that "important" stablecoins may bring.
If the issued stablecoins (ARTs/EMTs) meet at least three of the following criteria during the reporting period, they may be considered "significant" and subject to additional regulatory requirements:
The number of stablecoin holders is greater than 10 million;
The value of the issued stablecoin, its market capitalization or the size of the stablecoin issuer’s reserve assets is greater than EUR 5 000 000 000;
The average daily number of transactions and average total value of the stablecoin during the relevant period were higher than 2.5 million transactions and EUR 500 million, respectively;
The issuer of the stablecoin is a core platform service provider designated as a gatekeeper under Regulation (EU) 2022/1925 of the European Parliament and of the Council (43);
The importance of the activities of stablecoin issuers on an international scale, including the use of stablecoins for payments and remittances;
The interconnectedness of stablecoins or their issuers with the financial system;
The same issuer issues at least one additional stablecoin and provides at least one crypto-asset service.
If a stablecoin is identified as "important", the competent authorities will impose additional regulatory requirements on the stablecoin, for example, an independent audit should be conducted every six months from the date when EMTs are identified as "important". In addition, there are additional regulatory requirements such as fund supervision and reporting obligations.
According to MiCA regulations, in addition to being passively designated as "important", EMTs issuers can also apply to have the virtual currencies they issue designated as "important".
In summary, in addition to paying attention to general regulatory requirements, stablecoin issuers should pay special attention to the identification criteria for "important" stablecoins. Once the stablecoins issued are identified as "important", MiCA will impose higher regulatory requirements on the stablecoin issuers.
Quantoz: European Stablecoin Issuer Case
According to Bloomberg, Arnoud Star Busmann, CEO of Dutch blockchain company Quantoz Payments, said in an interview that Quantoz Payments will launch tokens pegged to the euro and the US dollar, and the company has been authorized by the Dutch Central Bank as an electronic currency issuer. This lays a compliance foundation for its future market expansion.
Currently, "Circle's EURC and Societe Generale's EURCV currently account for 67% of the euro stablecoin market, while Quantoz's EURQ is trying to carve out its own place." This move not only demonstrates Quantoz's market ambitions, but also reflects the efforts of emerging crypto companies to seek compliant development and innovative breakthroughs under the MiCA regulatory framework.
In the Euro stablecoin market, Circle and Societe Generale have established a strong market advantage, accounting for more than half of the market share. In this case, Quantoz must seek a differentiated strategy to break out of the market where there are already many giants.
With the gradual implementation of the MiCA regulatory framework, the compliance threshold of the stablecoin market continues to increase, which has a profound impact on the existing market structure. On the one hand, emerging issuers such as Quantoz that actively embrace regulation are rising rapidly; on the other hand, many established stablecoin issuers that fail to meet MiCA compliance requirements are gradually shrinking or even exiting the market. This trend shows that the future stablecoin market will be dominated by issuers that excel in compliance, transparency, and risk management.
in conclusion
This article focuses on MiCA's regulatory provisions on ARTs, and summarizes the compliance points of European stablecoin issuers facing MiCA from four aspects: authorization, obligations, reserves, and "importance". Due to the limited length of the article, it is not possible to cover everything, and it aims to provide a directional guide for stablecoin issuers. For any company or individual who plans or intends to issue stablecoins in Europe, compliance first is always the only way to control the risks of virtual currency operations. In order to control risks, in addition to strengthening their own compliance awareness and focusing on risk prevention and control, consulting compliance experts or lawyers is also an important way to prevent the risks of stablecoin issuance.