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Author: Cointelegraph

Translated by: Deep Tide TechFlow

Key Points

  • The MiCA regulation divides stablecoins into two categories: Asset-Referenced Tokens (ARTs) and Electronic Money Tokens (EMTs). These tokens must be fully supported by liquidity reserves at a 1:1 ratio and meet strict transparency and regulatory requirements to operate legally in the EU.

  • Algorithmic stablecoins, due to their lack of physical backing and reliance on market mechanisms to maintain value, are considered high-risk assets and are explicitly banned under the MiCA regulation.

  • Stablecoin issuers must meet multiple strict requirements, including registering as an Electronic Money Institution (EMI) or Credit Institution (CI), publishing a detailed white paper, storing reserve assets in EU-authorized third-party custodians, and integrating Digital Token Identifiers (DTIs).

  • It remains unclear whether Tether's USDT complies with MiCA requirements. During the transition period of MiCA, its use and availability in the EU may face certain limitations.

If you are interested in the cryptocurrency space, you may have heard of the EU regulation known as 'Markets in Crypto Assets' (MiCA).

But what does MiCA mean for stablecoins like Tether USDT?

What is MiCA?

MiCA is a comprehensive set of cryptocurrency regulatory regulations launched by the EU, aimed at regulating crypto assets including stablecoins. Its core objectives are to maintain the EU's dominant position in the monetary system, safeguard financial stability, and protect consumer rights.

One can view MiCA as the EU's statement of intent: 'We welcome cryptocurrencies, but they must be conducted responsibly and securely.'

Stablecoins under MiCA

Stablecoins are a special type of cryptocurrency designed to maintain stable value by pegging to traditional assets such as fiat currencies (e.g., US dollars, euros), commodities (e.g., gold), or even other cryptocurrencies.

According to MiCA regulations, stablecoins are categorized into the following two types:

  • Asset-Referenced Tokens (ART): Tokens supported by multiple assets (such as multiple currencies or commodities).

  • Electronic Money Tokens (EMT): Pegged to a single currency, similar to traditional electronic money.

To ensure the safety and stability of stablecoins, MiCA requires that all stablecoins must be supported by adequate liquidity reserves and maintain a 1:1 ratio with their underlying assets.

Fun fact: MiCA stipulates that international stablecoin issuers must use custodians authorized by the EU. For example, Circle's French subsidiary has issued USDC in Europe to comply with MiCA's regulatory requirements.

Ban on algorithmic stablecoins

An important provision of MiCA is to ban algorithmic stablecoins across the EU. Unlike ART and EMT, algorithmic stablecoins do not have clear traditional asset backing, but rely on complex algorithms and market mechanisms to maintain their value.

Due to the lack of clear and tangible asset backing, MiCA does not consider algorithmic stablecoins as asset-referenced tokens. Therefore, such tokens are effectively banned across the EU.

Compliance requirements for stablecoins under MiCA

If your company plans to issue stablecoins in the EU, you need to meet the following compliance conditions:

  1. Register as an Electronic Money Institution (EMI) or Credit Institution (CI): Issuers must obtain an EMI or CI license to ensure compliance with necessary financial and operational standards. For example, issuing or publicly trading EMT requires an EMI license, while public issuance or application for EMT listing requires a CI license.

  2. Publish a white paper: You will need to write a detailed document explaining the operational mechanism of the stablecoin, its asset backing, potential risks, and operational structure.

  3. Custody of liquidity reserves: You must hold sufficient liquidity reserves through a trusted third-party custodian and ensure that each stablecoin has 1:1 actual asset backing.

  4. Regularly report reserve status: Transparency reports need to be published regularly so that users and regulators clearly understand the asset backing of the stablecoin.

  5. Digital Token Identifier (DTI): DTI is the 'digital passport' of stablecoins and must be clearly marked in the white paper to provide information about the ledger where the token is located, helping regulators track related responsibilities.

The role of Digital Token Identifiers (DTI)

DTI is a unique identifier specifically designed to identify digital tokens, established by the International Organization for Standardization (ISO) under the ISO 24165 standard. It assigns a unique and permanent identifier to each digital asset.

Similar to how traditional securities use International Securities Identification Numbers (ISIN) to identify stocks, bonds, and other financial instruments, the introduction of DTI brings order to the cryptocurrency market. These identifiers use a combination of letters and numbers to ensure that each digital asset can be uniquely identified.

The DTI system is managed by the Digital Token Identifier Foundation (DTIF), whose main goal is to enhance market transparency, support compliance requirements, and strengthen interoperability between different blockchain networks and the traditional financial system.

By simplifying the tracking and management of digital assets, DTI can bring the following benefits to the market:

  • More efficient risk management: Helps businesses and regulators better monitor asset risks.

  • Optimized reporting processes: Simplifies the generation and submission of compliance reports.

  • More reliable market data: Provides accurate asset information, enhancing market trust.

If you are a stablecoin issuer, you need to follow these steps to apply for DTI:

  1. Submit application: Visit the DTI website, fill in the details of the token, and submit the application.

  2. Technical verification: Conducted by DTIF to audit the technical basis of the tokens.

  3. Assign DTI: After verification, your stablecoin will receive a unique DTI number.

For detailed application procedures, refer to the official MiCA guidelines and DTI quick guide.

Is Tether (USDT) compliant with MiCA?

The MiCA regulation requires that if stablecoins (like USDT) are classified as electronic money tokens (EMT), the issuer must obtain a license from a credit institution or electronic money institution and meet a series of compliance standards. However, Tether has not yet met these requirements, raising external questions about USDT's legal status in the EU.

There are differing views in the market regarding the uncertainty surrounding USDT's compliance. Some believe that USDT may face restrictions, while others think it may continue to operate during the transition period specified by MiCA.

Juan Ignacio Ibañez, a member of the MiCA Crypto Alliance Technical Committee, stated in an interview with Cointelegraph: 'Although no regulatory body has explicitly stated that USDT is non-compliant, this does not mean it is compliant.'

He further stated that Coinbase's decision to delist USDT could be seen as a cautious strategy, but there are currently no clear regulatory directives requiring other exchanges like Binance or Crypto.com to take similar actions. He predicts that as MiCA regulations are fully implemented, the regulatory environment for stablecoins will become clearer, and other exchanges may also face similar delisting decisions.

Discussions on USDT's status in the European market on social media have sparked widespread attention. Some believe that while USDT has not been immediately banned, MiCA requires it to achieve compliance during the transition period. This means that USDT may not necessarily exit the EU market entirely, but its liquidity and scope of use may be significantly affected by the implementation of MiCA.

There is a viewpoint that USDT may not be able to continue trading within Europe after December 30.

It is worth mentioning that Tether supports the Malta-based stablecoin company StablR, which focuses on two main projects: StablR Euro (EURR) pegged to the euro and StablR USD (USDR) pegged to the US dollar. These tokens utilize Tether's tokenization platform Hadron, thereby enhancing the flexibility and accessibility of stablecoin transactions.

Despite this, there is still uncertainty over whether USDT meets MiCA's compliance requirements. Currently, relevant regulatory bodies have not clearly stated whether USDT meets the requirements of MiCA or other laws. Before any official announcement is released, any claims regarding its compliance or potential bans lack definitive evidence.

Fun fact: Tether CEO Paolo Ardoino revealed at the PlanB event in Switzerland that Tether's reserves include $100 billion in U.S. Treasury bonds, 82,000 bitcoins (worth $5.5 billion at the time), and 48 tons of gold to support the value of its USDT stablecoin.

Will USDT still be usable on DEX after December 30?

Decentralized exchanges (DEX) themselves may not be directly affected by MiCA due to their decentralized nature. However, EU users must still comply with the new regulatory requirements. This means users need to verify whether USDT meets MiCA's compliance standards. Using non-compliant tokens may pose legal risks.

Which stablecoins comply with MiCA?

Compliant stablecoins adhere to the relevant laws, regulations, and standards set by authorities in various jurisdictions.

Compliance generally involves maintaining transparency, implementing rigorous anti-money laundering (AML) practices, and ensuring appropriate customer identity verification (KYC) procedures. Additionally, compliant stablecoins must have verifiable reserve backing and undergo regular audits, which helps foster trust within the market.

Here are some stablecoins that comply with MiCA requirements:

  • EURI: Issued by Banking Circle, registered in Luxembourg as a Credit Institution (CI) with DTI number LGPZM7PJ9, supporting Ethereum and BNB Smart Chain.

  • EURe: Issued by Monerium, registered as an Electronic Money Institution (EMI) of the Central Bank of Iceland, supporting Ethereum, Polygon, and Gnosis networks.

  • USDC and EURC: Issued by Circle Internet Financial Europe SAS (Circle SAS), registered as electronic money tokens, but as of December 26, its white paper did not provide DTI information.

  • EURCV: CoinVertible of SG Forge registered as EMI in France, based on Ethereum network, DTI number 9W5C49FJV.

  • EURD: Issued by Quantoz Payments, registered in the Netherlands, with DTI number 3R9LGFRFP, based on Algorand blockchain.

  • EUROe and eUSD: Issued by Membrane Finance Oy, registered in Finland, supporting multiple blockchain networks such as Concordium, Solana, Arbitrum, Avalanche, Ethereum, Optimism, and Polygon.

  • EURQ and USDQ: Launched by Quantoz Payments and supported by Tether, Kraken, and Fabric Ventures. These stablecoins are fully backed by fiat reserves and have obtained electronic money token licenses from the Central Bank of the Netherlands (DNB).

  • EURØP: A euro-backed stablecoin issued by Schuman Financial, fully supported by cash and cash equivalents. EURØP has obtained an electronic money token license from the French Prudential Control and Resolution Authority through its subsidiary Salvus SAS, planning to launch on Ethereum and Polygon, and to expand to major centralized cryptocurrency exchanges in Europe. Notably, this token will be restricted in 107 high-risk jurisdictions, including Iran, North Korea, and Venezuela.

Future development direction of EU stablecoins

The implementation of MiCA will reshape the EU cryptocurrency market through strict compliance standards and a ban on algorithmic stablecoins.

While this brings challenges for established stablecoins like USDT, it also provides more development opportunities for compliant euro-denominated stablecoins. The EU is setting a regulatory example for the global cryptocurrency market, which other regions may follow, thus promoting a more unified and secure development of the global market.