MiCA’s predecessor stablecoin treatment is counterproductive for the EU: Report
The European Union’s (EU) approach to regulating systematic stablecoins through the Markets for Cryptocurrency Assets (MiCA) framework is flawed and will only crowd out issuers, a recent paper argues. The paper compared the criteria used to evaluate predecessor banks and standard regulators and argued that the region is harsh on stablecoins.
According to MiCA, a stablecoin is classified as significant or systematic if it meets three of seven criteria, including holdings of more than €5 billion (US$6.28 billion), more than 10 million users, and daily processing volume of more than €500 million. . Other considerations include whether they are interconnected with the financial system and whether they will be used for payments on a global scale.
The report compares MiCA’s considerations with the regime applied to classify global systemically important banks (G-SIBs), formerly known as “too big to fail”.
Terra Luna’s UST lost $40 billion in value overnight (Lehman Brothers was worth $46 billion), but it did not impact financial markets at any level.
Raising the question: At what point will stablecoins become systemically important, or as MiCA says they are? https://t.co/T0bl7Suu8y
— Patrick Hansen (@paddi_hansen) February 14, 2024
The two authors, who are EU strategy director at USDC issuer Circle Financial and a former executive at BaFin, argue that G-SIBs merit more favorable and nuanced consideration than stablecoins.
For example, banks belonging to G-SIBs are much larger than stablecoin issuers. The smallest G-SIB is Standard Chartered (NASDAQ: SCBFF), which had total assets of $855 billion at the end of 2022. Some nuances also apply, with Standard Chartered and other similarly sized banks bundled in the smallest of the five buckets, with JPMorgan (NASDAQ: JPM) at the other end of the spectrum.
In contrast, for stablecoins, once the threshold of just €5 billion is reached, soundness requirements become significantly higher.
“Whatever risks the concept of materiality under MiCA seeks to capture based on the €5 billion threshold, it seems highly unlikely that evidence of a systemic threat to the EU, let alone the world, will be available now or in the future. “The financial stability that comes from (stablecoins) at that scale,” the authors argue.
MiCA’s disconnect with real-world stablecoin dynamics can be partially attributed to Meta’s (NASDAQ: META) failed stablecoin project, Libra. Libra caught on to European regulators’ failure to recognize this, and they aggressively put up roadblocks to prevent Libra from launching.
Since then, they have applied the Libra standard to all stablecoins. According to their estimates, Libra’s assets under management would amount to at least 152.7 billion euros ($163.6 billion) if it were used solely as a payment method. If stablecoins were to move into the ‘store of value’ realm, their assets would reach around 3 trillion euros ($3.2 trillion).
The authors proposed revising the stablecoin materiality framework under MiCA. Otherwise, “this could be detrimental to the EU’s goal of keeping large parts of this market under regulatory reach to protect consumers.”
Watch CoinGeek Roundtable: Tokenizing Gold and Stablecoins
Are you new to blockchain? To learn more about blockchain technology, check out CoinGeek’s Blockchain for Beginners section, our ultimate resource guide.