Europe Prepares for Stablecoin Regulation, Leaves the US Lagging Behind

In a statement released July 12 Europe’s financial watchdog, the European Banking Authority (EBA) encouraged timely preparation for new Markets in Crypto-Assets (MiCA) regulations which will affect several cryptocurrencies. MiCA’s implementation could be an important step towards mainstream acceptance of these new digital assets, but other countries lag in developing new regulations, including the US.

The anticipated Markets in Crypto-Assets (MiCA) regulations for Europe include principles for consumer protection and risk management including the expectation for clearer disclosure on stablecoin projects and assets for buyers and investors. MiCA took effect in June 2023, the outlined stablecoin provisions will be applied from June 2024.

On the whole, the new regulations won’t affect non-fungible tokens (NFTs). Thought there is some provision within the detail that could affect a larger series of NFT tokens or a large collection. Per Decrypt, Bored Ape could be one such NFT collection to attract attention. The regulations will certainly affect stablecoins like Tether (USDT) which is pegged to the US dollar and is a popular casino crypto coin.

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What are Stablecoins?

Stablecoins are cryptocurrencies that are pegged, or linked, to another asset such as fiat currency like the dollar or an asset like gold. This “pegging” takes advantage of the market stability of the other asset, making stablecoins less responsive to cryptocurrency market fluctuations and preventing their value from rising or falling too quickly. This much lower volatility of stablecoins makes them far more suitable to be used as a payment method, like a fiat currency because consumers can be more confident about the value of the coin.

Transparency and Protection for Cryptocurrency Users

MiCA is part of wider digital finance regulation created by the European Union and it will apply to two key groups of stablecoins:

1. Those backed by a single currency; and
2. Those that are backed by a group of fiat currencies or other assets.

The new laws will affect the companies creating these tokens as well as exchanges, traders, and cryptocurrency service providers.

They include measures for token issuers, such as obligating them to publish detailed whitepapers, which in some cases will need to be approved by regulators, to facilitate transparency for consumers. As well as providing greater disclosure, cryptocurrency businesses will need to comply with anti-money laundering and data security rules.

Critically, MiCA introduces liability for cryptocurrency businesses and strong requirements to protect customer funds as well the threat of fines. The EBA is set to publish further consultation papers and it continues to monitor cryptocurrencies and their risks whilst collaborating with the European Commission and other bodies, including international organizations such as the Banking Supervision and Financial Stability Board.

The US Could Fall Behind, Despite the Potential Benefits for US Consumers

The US, per a Barron’s article in the past few days, runs the risk of losing an opportunity to influence stablecoin regulation. Despite a President’s Working Group on Financial Markets beginning discussions on stablecoin risk and regulation two years ago the US has not progressed a framework. Author Timothy Massad says that competition from stablecoins has the potential to improve the payments system in the US, he adds:

“Few of us notice that—our credit cards, mobile banking and phone apps seem to work just fine. But although our system is safe and reliable, it is slow and expensive compared to what’s possible.”

Massad also says that “improving the technology of payments,” could also help to secure the dollar’s place as the dominant global currency.

Cryptocurrencies, or digital currencies, have for some time now promised their potential for revolutionizing global payments. They are easier to use across borders and have faster transaction times and lower transaction costs, amongst other benefits. One of the risks associated with cryptocurrencies is their volatility and few can fail to have noticed Bitcoin’s huge price fluctuations in recent years (see Bitcoin is Back). Stablecoins were created to solve the issue of volatility and to be more able to compete with the reliability of fiat currencies for payments and general consumer use.

Thus far, the cryptocurrency industry has been plagued with news of investor losses, through exchange collapses and breaches and because of “bad actors,” who have taken advantage of a new and unregulated financial space.

Stablecoins too have had their fair share of controversy. One of the most significant risks is that stablecoin issuers don’t actually hold enough of the asset reserves backing their stablecoin. Tether (USDT), often used to move money between cryptocurrency exchanges, faced related accusations and was eventually required by the New York Attorney General to provide evidence of its USD reserves for a two-year period.

MiCA’s impact has yet to be felt but it’s long been hoped that the right regulation, curbing bad actors and providing rules that allow legitimate businesses to thrive, will increase consumer confidence and wider cryptocurrency adoption.

Crypto investors and crypto betting players, despite growing regulation in the cryptocurrency space, should always be aware of the risks of digital assets, whether stablecoins or NFTs or other fungible coins like Bitcoin.

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