Written by: Aiying

Recently, the EU's upcoming "Markets in Crypto-Assets" (MiCA) regulations have attracted widespread attention. This regulation has a far-reaching impact on the cryptocurrency industry, especially the stablecoin market. MiCA requires that stablecoins backed by fiat currencies must have sufficient liquidity reserves and obtain an "electronic money license". In addition, it also stipulates the upper limit of stablecoin trading volume and other asset support requirements. June 30 is an important node, requiring exchanges to remove stablecoins that do not comply with regulations.

In the face of MiCA regulations, major cryptocurrency exchanges in the EU have taken measures. This week, Bitstamp announced that it would remove stablecoins that do not meet MiCA requirements, such as Tether's EURT, and communicate directly with affected customers. Binance also restricted users from using unauthorized stablecoins and copy trading services, and recommended that users convert to compliant digital assets or fiat currencies. In contrast, Coinbase has not yet taken clear preventive measures, but said it will continue to monitor the situation to ensure compliance with MiCA standards.

The implementation of the MiCA regulation has brought multiple challenges to the EU cryptocurrency market. Since most stablecoins are pegged to the US dollar, it will be difficult for many stablecoins to comply with the MiCA requirements in the short term, resulting in restricted transactions and reduced liquidity. Jasper De Maere, head of research at Outlier Ventures, pointed out that the new regulations may restrict trading activities and crypto investment opportunities for European citizens, and force companies to reduce their activities in the EU, affecting industry innovation and consumer market access.

Although the MiCA regulations bring compliance challenges and market uncertainty, they also provide legal clarity and investor protection. In the future, as more exchanges and stablecoin issuers adjust their strategies to comply with MiCA requirements, the EU cryptocurrency market is expected to continue to develop under the new regulatory environment. Industry experts believe that MiCA has a positive role in providing legal clarity and protecting investors, and may become a model for international crypto regulation.

Previously, Aiying Aiying compiled an article [10,000-word research report on the European MiCA bill: a comprehensive interpretation of the far-reaching impact on the Web3 industry, DeFi, stablecoins and ICO projects] which discussed in detail the possible impact of the bill. The following is one of the excerpts:

The potential impact of the Mica Act

Impact 1: Delisting of privacy coins

Crypto assets with built-in anonymity features (such as "privacy coins" such as Monero and Zcash) can only be allowed on trading platforms if CASPs or relevant regulators can identify token holders and their transaction history. Since this is not practically possible, it is expected that EU-regulated cryptocurrency exchanges will remove privacy coins from their products.

Impact 2: CASP, which has obtained relevant European licenses, will find it easier to obtain Mica’s license

CASPs that have already obtained a license under the national framework will benefit from a simplified MiCA authorization procedure and have up to 18 months to obtain a final MiCA license. For example, regulated crypto custodians in Germany may benefit from these simplified procedures and transitional measures. However, only MiCA-licensed CASPs will have the opportunity to provide services throughout the EU single market through a so-called cross-regional license. This is why it is expected that most cryptocurrency businesses will apply for MiCA authorization as soon as possible.

Impact 3: Unifying the European market

MiCA regulations will bring unified supervision, enhance competitiveness and promote institutional development. Until now, EU crypto companies have had to apply to regulators in each country if they want to serve the entire EU market, which is costly and cumbersome. Under MiCA, the same binding EU requirements will apply to all 27 member states. Once a company obtains a MiCA license in one country, it will be able to provide licensed services throughout the EU single market through "cross-regional licensing."

Impact 4: Offshore companies will be restricted, benefiting EU companies

After MiCA comes into effect, offshore, unregulated companies will not be able to actively attract EU customers. Even the rules for foreign companies to accept customers when they are actively contacted by EU users will become stricter. This means that MiCA-regulated crypto companies will grab more EU market share from these unregulated overseas competitors.

Impact 5: MiCA promotes institutional participation and European banks accelerate their deployment

MiCA could lead to increased institutional adoption and activity in the EU crypto market. According to Bloomberg, only 4% of European institutional funds are exposed to crypto assets. Regulatory uncertainty is one of the main concerns that prevents institutions from entering this space. It is expected that in the next 48 months, major European banks will launch crypto asset services, whether it is custody, trading, or the issuance of e-money tokens or asset-referenced tokens.

Impact 6: MiCA’s impact on stablecoin issuers

MiCA's new regulatory rules will bring major compliance challenges to stablecoin issuers such as Tether, especially considering that Tether has not fully disclosed the status and composition of its reserves, nor has it been fully audited by an authoritative independent agency. Tether has also been involved in multiple lawsuits and investigations, including a $18.5 million settlement with the New York Attorney General's Office and a rumored investigation by the U.S. Department of Justice on charges of bank fraud, money laundering, and illegal operations. In the future, stablecoin issuers such as Tether will face greater compliance reform costs.

In order to meet these challenges, Tether should actively promote its own compliance process and establish good cooperative relations with EU regulators and third-party auditing agencies to improve its market credibility and competitiveness. In the face of increasingly stringent regulatory requirements, Tether has taken measures to promote compliance. For example, Tether recently announced that it will cooperate with the Italian branch of BDO International, the world's fifth largest accounting firm, which will be responsible for auditing the company's reserve guarantee and certification reports, and plans to change the frequency of audit reports from quarterly to monthly.

Under the framework of MiCA, the issuance of stablecoins will become more compliant and transparent. Stablecoin issuers such as Tether need to accelerate the compliance process to adapt to the new regulatory environment and remain competitive in the EU market.

Impact 7: MiCA’s impact on Defi

MiCA applies to businesses – both natural and legal persons and “certain other businesses”. “Other businesses” may include entities that are not legally established, but the EU has clarified that decentralized DAOs and protocols are not newly targeted. Paragraph 22 of MiCA clarifies that “crypto-asset services should not be within the scope of this Regulation if they are provided in a fully decentralized manner without any intermediaries.” This core statement is supported by multiple public statements by key officials of the European Commission and Parliament.

However, the devil is in the details. The bill states that MiCA may apply even if some activities or services are performed in a decentralized manner. This means that if there are certain parts or links in a DeFi project that are not fully decentralized, it may still need to comply with the relevant provisions of MiCA.

How much decentralization (technical, governance, legal, etc.) is needed to be out of scope? It is a subjective judgment call with no ambiguity. I expect some enforcement and litigation cases to revolve around this question. The EU is generally reluctant to enforce their laws in other countries, but if some DeFi projects are nominally decentralized but in fact centralized and provide services in Europe or to EU users, the EU will be particularly concerned.

DeFi projects have two options if they want to be outside the scope:

  • Prove full decentralization (high threshold)

  • Blocking EU users

  • Still, the EU deserves praise for excluding truly decentralized DeFi projects from its regulations for traditional financial firms, and it would be great news if something from MiCA becomes a global standard.

Impact 8: Challenges and uncertainties

However, the actual success of MiCA is highly dependent on the implementation standards and enforcement practices developed by EU regulators in the next 12-18 months. Some provisions may impose burdens on industry players, and their full impact will only be apparent once technical implementation standards provide practical operational guidance.

Impact 9: High compliance costs and hindered innovation

As was the case recently in Hong Kong, where compliance costs were too high and businesses fled, Mica’s compliance costs will similarly cause stablecoin issuers to bypass the EU, and the disclosure requirements and responsibilities faced by exchanges will be too onerous to provide benefits to consumers, making their products uncompetitive with offshore competitors. EU consumers will either be cut off from innovation or continue to use (and be exposed to) the largest pools of offshore liquidity and utility. In addition, regulators may decide that most NFT and DeFi projects are actually within the scope of MiCA and need to comply - a door that the current MiCA preamble still leaves open for interpretation. This will inevitably lead to the migration of teams and resources out of the EU.