Written by: Aiying
Recently, Aiying has observed that some news reports have expressed concerns about the stablecoin restrictions in the EU's Markets in Crypto-Assets Regulation (MiCAR). The stablecoin-related regulations came into effect at the end of June and do have some strict restrictions, and once the limits are reached, stablecoin activities must be stopped. However, these restrictions are mainly aimed at payments for everyday goods and services, rather than cryptocurrency trading or investment.
1. Specific regulations on the use of stablecoins
The EU's position is that if you want to use stablecoins to buy cryptocurrencies or conduct decentralized finance (DeFi) activities, that's fine. But if you want to use stablecoins to buy coffee or pay rent, you must use euro (or other EU currency) stablecoins. These restrictions are mainly to protect monetary sovereignty. This was detailed in Aiying's previous article "European MiCA Act 10,000-word Research Report: Comprehensive Interpretation of the Far-reaching Impact on the Web3 Industry, DeFi, Stablecoins and ICO Projects":
The EU Crypto-Asset Market Regulation (MiCAR) sets detailed regulations and restrictions on the use of stablecoins. The following are the main contents:
Relaxed regulations for cryptocurrencies and DeFi: MiCAR allows the use of stablecoins for cryptocurrency transactions and decentralized finance (DeFi) activities without specific restrictions. This means that if you want to buy cryptocurrencies or conduct DeFi activities with stablecoins, you can do so.
Strict restrictions on payment for goods and services: If you use stablecoins to pay for everyday goods and services (such as buying coffee or paying rent), you are required to use euro (or other EU currency) stablecoins. These restrictions are mainly to protect the EU's monetary sovereignty and prevent foreign currency stablecoins from excessively affecting the EU's monetary system.
Specific restrictions on foreign currency stablecoins: The use of foreign currency electronic money tokens (EMTs) and asset-referenced stablecoins (ARTs) in real-world transactions is strictly restricted. For example, when the usage exceeds 1 million transactions or 200 million euros per day within the single currency area, the issuance must be stopped. These regulations are intended to prevent foreign currency stablecoins from being widely used within the EU and affecting the stability of the euro.
Concessions and modifications by the EBA: To ensure the effective implementation of the regulations, the European Banking Authority (EBA) has made some adjustments in the final version. For example, transactions between non-custodial wallets are not required to be reported, which reduces the compliance burden for crypto companies and freelancers. In addition, the EBA and the European Securities Markets Authority (ESMA) will be responsible for monitoring and managing the implementation of these regulations.
Therefore, the EU has no restrictions on electronic money style stablecoins for the euro or other EU currencies, but there are restrictions on foreign currency electronic money tokens (EMTs) and asset referenced stablecoins (ARTs). For example, Facebook's Libra/Diem is an ART stablecoin that is pegged to multiple currencies, commodities or other assets. Aiying thinks this is understandable, because if foreign currency stablecoins (such as US dollar stablecoins) are widely used in the EU, this will make the EU's financial system affected by external monetary policy and economic conditions. For example, if the US dollar's monetary policy changes, this change may affect the economic and financial stability within the EU through the channel of stablecoins.
II. Analysis of specific quota limit scenarios
Under MiCAR, if a foreign currency electronic money token (EMT) or asset-referenced stablecoin (ART) is used in more than 1 million transactions per day or a total transaction volume of more than €200 million within a single currency area, the issuance of that stablecoin must cease.
1. Understand the limits
To better understand this limit, we can compare the current trading volume of major stablecoins in the market. For example, Tether (USDT) has a daily trading volume of between 15 billion and 67 billion USD in June 2023. However, it is important to note that the vast majority of these transactions are for cryptocurrency transactions, not real-world payments. Therefore, these cryptocurrency transactions do not count towards the €200 million limit set by MiCAR, as this limit only applies to real-world payments within the EU.
2. Exclude transactions that are not counted towards the limit
The final draft rule excludes several categories of transactions from the cap, including:
Transactions where one of the parties is outside the EU
Investment-related transactions (not limited to cryptocurrency investments, but also other investments)
The existence of these exclusions suggests that the main goal of the MiCAR regulation is to control the use of stablecoins for everyday payments within the EU, rather than restricting their financial and investment activities worldwide.
3. Asset Reference Stablecoin (ARTs) Exchange Means
In the context of MiCAR regulations, “transactional methods” refers to the way in which asset-referenced stablecoins (ARTs) are used in various trading activities. The EBA provides clear explanations on which transactions should be counted in the total transaction volume and value of ARTs and which should not be counted.
Transaction types not included in "transaction method" EBA explicitly states that the following types of transactions should not be included in the total transaction volume and value of ART:
Transactions involving the exchange of funds or other crypto-assets with an issuer or crypto-asset service provider (CASP): These transactions involve the exchange of funds or crypto-assets directly involving an issuer or CASP and are not counted as “transactional means”.
Transactions using ART as collateral for transactions in financial instruments: When ART is used as collateral or security for transactions in financial instruments, such transactions are not included.
Transactions using ART to settle derivative contracts: This refers to transactions using ART to settle derivative contracts and is also not counted as “transaction means”.
Other transactions where the issuer reasonably believes that the purpose of the transaction is not payment for goods or services: If the issuer can reasonably prove that certain transactions are not used to pay for goods or services, these transactions are also not counted.
These rules ensure that these limits do not hinder market activity from the perspective of tokenization of real-world assets. The preamble to MiCAR also discusses transactions using stablecoins as payment intermediaries, such as retail payments made by cryptocurrency exchanges through Visa and Mastercard cards.
IV. Adjustments and concessions of EBA
The European Banking Authority (EBA) has consulted on the implementing rules of the MiCAR Regulation and published a summary of its response. Here is a detailed explanation:
Concessions and adjustments to the EBA
Data reporting requirements: In order to assess whether stablecoins have exceeded the limits set by MiCAR, the EBA requires stablecoin issuers to report data every quarter. These data include transaction volume and value to ensure that regulators can monitor and assess stablecoin market activities.
Data reporting of off-chain transactions: MiCAR regulations require crypto asset service providers (CASPs) to provide data to stablecoin issuers, including their recorded off-chain transactions. This means that many crypto exchanges, although not conducted on the blockchain, still need to report to issuers to ensure that all relevant transactions are included in the total transaction volume and value.
Transactions between non-custodial wallets: An important concession of the EBA is that it does not require issuers to report transactions between non-custodial wallets. Non-custodial wallets are cryptocurrency wallets where users manage their own private keys and do not rely on third-party services. This arrangement reduces the regulatory burden on individuals and small businesses. For example, crypto companies use stablecoins to pay employees and freelancers, which technically counts as payments for goods and services. But because both parties to these payments use non-custodial wallets, these transactions are not counted towards the €200 million/day limit
Although the EBA has relaxed the reporting requirements for non-custodial wallet transactions, this does not mean that all transactions using non-custodial wallets can bypass the reporting obligation. This is because:
1. Limited scope of relaxation:
The relaxation of the EBA is limited to transactions between non-custodial wallets, that is, these transactions do not need to be reported only when both parties to the transaction use non-custodial wallets.
Reporting obligations remain for transactions involving custodial wallets or other forms of transactions.
2. Supervision of large transactions:
While small transactions can avoid reporting through non-custodial wallets, for large transactions, regulators may take additional measures to monitor and manage to prevent regulatory circumvention.
For example, the EBA and other regulators may monitor the activities of exchanges and large market participants to ensure they comply with relevant regulations.
3. Technical means and legal framework:
Regulators can use technology to track large or suspicious transactions, even if they are conducted through non-custodial wallets.
The legal framework may also need further adjustments to address potential circumvention behavior and ensure effective regulation and market fairness.
4. Limitations in practical operation:
For many businesses and users, it is not practical to rely entirely on non-custodial wallets for transactions. Although non-custodial wallets provide greater autonomy and privacy protection, they also require users to have certain technical capabilities and security awareness, which may be a challenge for ordinary users and small businesses.
In general, although the EBA's concessions do reduce the regulatory burden on some small and individual transactions, it is not realistic to completely bypass the reporting obligation. Regulators still have a variety of means and mechanisms to ensure market transparency and compliance.
By analyzing in detail the specific provisions and impact of the EU's Markets in Crypto-Assets Regulation (MiCAR) on stablecoins, as well as the adjustments and concessions made by the European Banking Authority (EBA) during implementation, we can see that the MiCAR regulation aims to balance the relationship between innovation and regulation, including its flexibility and resilience, which is worthy of learning from other regions.