This article focuses on MiCA's regulatory provisions for ARTs, summarizing the compliance points faced by European stablecoin issuers in four aspects: authorization, obligations, reserves, and 'significance'.

Article author: Liu Honglin, Founder of Shanghai Mankun Law Firm;

Bai Qin, Head of Hong Kong Office of Shanghai Mankun Law Firm;

Song Kewei, Assistant Lawyer at Shanghai Mankun Law Firm

According to DefiLlama data, 'The total market value of stablecoins has grown by 2.46% over the past week, currently reported at $182.489 billion. Among them, USDT's total market value has increased by 0.07%, now reported at $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 EU (Markets in Crypto-Assets Regulation) (MiCA) is 'one of the most comprehensive regulatory frameworks for digital assets to date.' Since the enactment of this legislation, Coinbase has announced it will delist USDT for European users by the end of the year, and other exchanges have taken similar actions. This article will outline the regulatory framework of MiCA for EU stablecoin issuers, providing compliance references for enterprises and individuals entering the EU crypto market.

It is worth noting that due to space constraints, we cannot cover all compliance provisions in the legislation but will select important parts for preliminary analysis based on the literal meaning of the articles. Such explanations cannot fully reflect the entire content of the provisions and are for reference only.

I. What are stablecoins? Definitions and classifications in MiCA

Stablecoins are a type of cryptocurrency whose value is pegged to fiat currency, commodities, cryptocurrencies, and other assets, designed to leverage the advantages of cryptocurrency while minimizing price volatility.

Currently, in the regulatory framework of the EU (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 stable value by pegging to one official currency. EMTs are akin to the 'embodiment' of fiat currencies in the Web3 realm and can be compared to CBDCs (Central Bank Digital Currency) that may be issued by non-state entities.

'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 and EMTs aim to maintain stable value, but they achieve this through different paths: by pegging to multiple assets, which may include various 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 risk, but due to the diversification of underlying assets, it requires relatively stricter supervision. Compared to traditional fiat currencies, which are pegged to gold or backed by government credit, ARTs adopt a more flexible 'portfolio' approach, allowing for risk diversification through various configurations of underlying assets, or choosing a specific asset to maintain stability. ARTs provide more options for the design and innovation of stablecoins.

II. Overview of regulatory points for stablecoin issuers

The main content of the MiCA legislation revolves around the issuance and trading rules of ARTs and EMTs. Articles 16 to 47 (31 in total) are regulations for ARTs, while Articles 48 to 58 (10 in total) apply to EMTs. The regulations for ARTs, being more diverse, are more detailed in MiCA. For brevity, we will focus on ARTs in our overview, highlighting if we refer to ARTs or EMTs separately. If we simply refer to 'stablecoins', it encompasses both ARTs and EMTs. According to the provisions of each chapter of MiCA, four relatively important compliance points are as follows:

Authorization 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

Identification of significant asset-referenced tokens

III. Authorization to offer asset-referenced tokens to the public and to seek their admission to trading

Qualification admission

Regarding the issuance of ARTs, no one may publicly issue ARTs in the EU or seek approval for trading unless that person is authorized as an issuer of ARTs and:

a) Establishing legal entities or other enterprises authorized by the competent authority of its member state according to Article 21 through legal procedures; and

b) Credit institutions as per the provisions of Article 17.

Cryptocurrency White Paper

The white paper for stablecoins (EMTs/ARTs) should include 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 for ARTs and EMTs overlap for items 1-6 and item 8, but for item 6 regarding information on the reserve of assets, ARTs have such a provision while EMTs do not. This indicates that MiCA imposes relatively higher requirements on the asset reserves of ARTs.

In addition, stablecoin issuers should publish the approved cryptocurrency white paper on their websites, and as long as someone holds that cryptocurrency, the stablecoin issuer should continuously disclose information on the website.

Finally, if the content of the white paper is incomplete, unfair, unclear, or misleading, the stablecoin issuer should bear legal responsibility for this.

In summary, the disclosure of cryptocurrency white papers is crucial for safeguarding 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

Through Level 1, after obtaining authorization, issuers are granted access to issue stablecoins in the EU; however, this does not mean everything is fine, and issuers can rest easy. The MiCA legislation follows with obligations of issuers of asset-referenced tokens.

The obligation to act honestly, fairly, and professionally in the best interest of the holders of asset-referenced tokens: This obligation mainly serves as a principled guideline. While abstract, it provides guidance on the subjective purpose of issuers' actions.

Marketing communications: Any marketing communication related to the trading of stablecoins should be clear, explicit, and consistent with the crypto-assets. MiCA has stringent requirements for the issuance and statements of stablecoins to avoid provocative and enticing statements, controlling speculation risks from the source.

Ongoing information to holders of asset-referenced tokens: Stablecoin issuers should continuously disclose information at least once a month. Disclosure regarding the issuance of stablecoins is not a one-time event but ongoing, and issuers must ensure that issuing information is continually accessible to regulatory agencies, investors, and other stakeholders.

Complaints-handling procedures: Stablecoin issuers should establish and maintain effective and transparent procedures to promptly, fairly, and consistently address complaints received. Stablecoin issuers should set up a comprehensive internal mechanism for complaint handling and feedback, concentrating on resolving conflicts internally.

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, explicit, transparent, and consistent scope of responsibilities, effective procedures to identify, manage, monitor, and report risks they face or may face, as well as appropriate internal control mechanisms, including sound administrative and accounting procedures.

Own funds requirements: Stablecoin issuers must at all times have funds equivalent to the highest amount of the following: (a) 350,000 euros; (b) 2% of the average amount of the asset reserves as referred to in Article 36; (c) one-quarter of the fixed management costs of the previous year. Stablecoin issuers also need to maintain a certain 'deposit reserve' to address potential risks in the issuance and trading of virtual currencies.

From the above provisions, it can be seen that MiCA has relatively comprehensive obligations for stablecoin issuers, especially regarding information disclosure (ongoing disclosure) and transmission (marketing communications). It is evident that MiCA aims to prevent fraud, speculation, and other risks from the source, safeguarding the interests of stablecoin holders. On the other hand, these provisions also impose higher compliance requirements on stablecoin issuers.

V. Asset reserves of stablecoin issuers

From the obligations of stablecoin issuers, we can see that MiCA imposes high requirements on issuers' own funds, with a separate chapter describing the asset reserves of stablecoin issuers (Reserve of assets). 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 a reserve of assets 'at all times.' It is particularly noteworthy that the asset reserves must be legally segregated from the issuer's assets to ensure that, in the event of the stablecoin issuer's inability to settle its own debts, creditors have no right to pursue the asset reserves. This provision requires stablecoin issuers to achieve asset segregation, and issuers must carefully consider the legal structure of their assets to mitigate this risk.

Custody of reserve assets: Stablecoin issuers should establish and maintain custody policies for reserve assets to avoid the risk of excessive concentration of reserve assets.

Investment of the reserve of assets: If stablecoin issuers wish to invest part of their asset reserves, they may only invest these assets in highly liquid financial instruments that minimize market risk, credit risk, and concentration risk. They should avoid exposing reserve assets to unnecessary risks for higher returns.

Right of redemption: Stablecoin holders should have the right to redeem reserve assets at any time. This right requires issuers to establish comprehensive policies regarding this permanent redemption right.

Prohibition of granting interest: Issuers of EMTs are prohibited from granting interest related to EMTs, including compensation, discounts, etc.

Special provisions for EMTs

Regarding the issuance and redemption of EMTs, MiCA states that EMT issuers must issue at face value upon receipt of funds, which is not reflected in the regulation of ARTs.

VI. Identification of significant stablecoins

In addition to general stablecoins, MiCA also stipulates 'significant' stablecoins, and stablecoin issuers should pay extra attention to the additional regulatory requirements that 'significant' stablecoins may bring.

If the issued stablecoins (ARTs/EMTs) meet the following three criteria during the reporting period, they may be classified as 'significant' and subject to additional regulatory requirements:

The number of stablecoin holders exceeds 10 million;

The value of the issued stablecoins, their market capitalization, or the asset reserves of the stablecoin issuer is above 5,000,000,000 euros;

The average daily trading volume and average total value of the stablecoin during the relevant period exceed 2.5 million transactions and 500 million euros, respectively.

The stablecoin issuer is designated as a core platform service provider by the European Parliament and Council (EU) Regulation 2022/1925.

The importance of the issuer's activities involving stablecoins on an international scale, including using stablecoins for payments and remittances;

The interconnection between stablecoins or their issuers and the financial system;

The same issuer issues at least one additional stablecoin and provides at least one cryptocurrency service.

If stablecoins are identified as 'significant', the competent authority will impose additional regulatory requirements on them, such as: independent audits every six months from the date EMTs are designated as 'significant'. In addition, there are extra regulatory requirements like fund supervision and reporting obligations.

According to MiCA, in addition to being passively recognized as 'significant', EMT issuers may also apply for the recognition of their issued virtual currency as 'significant'.

In summary, stablecoin issuers should pay special attention to the identification criteria for 'significant' stablecoins in addition to general regulatory requirements. Once the issued stablecoins are identified as 'significant', MiCA will impose higher regulatory requirements on the issuers.

VII. Quantoz: A Case Study of European Stablecoin Issuers

According to Bloomberg, Arnoud Star Busmann, CEO of Dutch blockchain company Quantoz Payments, stated in an interview that Quantoz Payments plans to launch tokens pegged to the euro and dollar, having obtained authorization from the Dutch central bank as an electronic money issuer. This lays a compliance foundation for its future market expansion.

Currently, 'Circle's EURC and Societe Generale's EURCV account for 67% of the euro stablecoin market, while Quantoz's EURQ is trying to carve out its own niche.' This move not only demonstrates Quantoz's market ambitions but also reflects the efforts of emerging crypto companies seeking 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, occupying over half of the market share. In this context, Quantoz must seek differentiation strategies to break through in a market dominated by existing giants.

With the gradual implementation of the MiCA regulatory framework, the compliance threshold in the stablecoin market is continuously rising, profoundly impacting the existing market landscape. On one hand, emerging issuers like Quantoz, who actively embrace regulation, are rapidly rising; on the other hand, many established stablecoin issuers that failed to meet MiCA compliance requirements are gradually retracting or even exiting the market. This trend indicates that the future stablecoin market will be dominated by issuers that excel in compliance, transparency, and risk management.

Conclusion

This article focuses on MiCA's regulatory provisions for ARTs, summarizing the compliance points faced by European stablecoin issuers in four aspects: authorization, obligations, reserves, and 'significance'. Due to space limitations, we cannot cover everything, and the aim is to provide a directional guide for stablecoin issuers. For any enterprise or individual planning to issue stablecoins in Europe, compliance must come first; it is the only way to control the operational risks of virtual currencies. To manage risks, enhancing one's compliance awareness, focusing on risk prevention, and consulting compliance experts or lawyers are also vital ways to mitigate the risks of issuing stablecoins.