Stablecoins constitute a class of crypto-assets that aim to maintain a steady value, addressing the issues raised by volatility in the crypto-industry. However, stablecoins have a real potential to heavily disrupt the current ways value is stored and exchanged on a global scale.

This bulletin follows on from our previous paper dedicated to the Regulation on Markets in Crypto-assets (MiCAR) (MiCAR under the microscope – Part 2: Are you in or out of scope?) and delves into the EU’s response to regulating stablecoins, more specifically, the MiCAR framework applicable to asset-referenced tokens (ARTs) and electronic money tokens or e-money tokens (EMTs).

What are stablecoins and what is special about them?

Stablecoins are a type of cryptocurrency which aim to address the high volatility of other (non stable)

cryptocurrencies, such as Bitcoin, Ether, etc. The high volatility of cryptocurrencies has been perceived by DLT users and by the wider financial industry as an impediment to their widespread use to settle transactions in the global economy, where the trust and stability of the value of exchange is of the essence. For cryptocurrencies to make a breakthrough in the international finance community, one of the contemplated solutions was to stabilise the fluctuations in the value of a cryptocurrency. To achieve this, two approaches can be used when designing a stablecoin:

− Designing a “backed (or pegged)” stablecoin, whose value is tied (or pegged) to other asset classes (such as fiat currencies, precious metals, other cryptocurrencies or

other investments) therefore granting it a stable and steady value, tied to the value of the relevant underlying assets; or

− Designing an “algorithmic” stablecoin, which uses algorithms to control the stablecoin’s supply by automatically increasing or decreasing the amount of stablecoins in circulation to stabilise the price.

From the first stablecoins issued in 2014 (BitUSD and NuBits), numerous other well-known names followed, such as Tether USDT, Circle USD Coin (USDC), Binance Dollar (BUSD) or more recently PayPal USD (PYUSD), to the point that some industry blogs estimate the number of stablecoins currently in circulation is over 200. This demonstrates the sheer competition but also potential disruption in this space, given the features a stablecoin is supposed to have: security and efficiency of DLT platforms, and the stability in value of such a cryptocurrency.

In light of the high potential to become an actual alternative to the current forms of money we use (at least in a digitalised environment), stablecoins are also the source of some concern for advanced world economies (and their financial industry). The possible issues large scale disruption could trigger without proper regulation, in a field so far tightly controlled and centralised at State level, is indeed likely to exacerbate sensitivities. What is probably the best example of these concerns was Meta’s stablecoin project labelled as “Libra” (later rebranded as Diem) which was meant to be the first stablecoin with the potential of reaching a global scale. The project received significant backlash from regulators across the globe (which ultimately led to its cancellation and sale), who expressed their concerns about the risks that Diem would pose to global financial and payments systems in the absence of an adequate regulatory framework.

Amongst the key regulatory concerns were the challenges relating to the fight against money laundering and terrorist financing, as well as the issues of becoming a widespread means of payment, as stated by the European Central Bank (ECB) itself (and potentially replacing fiat currencies in retail transfers).

EU’s response: a new ART and EMT regime under MiCAR

Against the above background, it is easy to appreciate why the EU legislator sought to specifically regulate and supervise the issuance of stablecoins under MiCAR.

While MiCAR does not specifically define the term “stablecoin”, it introduces the notions of ARTs and EMTs, which in the eyes of the EU legislator, are the two potential forms a stablecoin may take (without otherwise qualifying as something that would be out of scope of MiCAR, such as a financial instrument) in light of the current types of stablecoins issued so far. This position is well summarised in Recital 41 of MiCAR, providing that:

“Where a crypto-asset falls within the definition of an asset- referenced token or e-money token, Title III or IV of this Regulation should apply, irrespective of how the issuer intends to design the crypto-asset, including the mechanism for maintaining a stable value of the crypto-asset. The same applies to so-called algorithmic ‘stablecoins’ that aim to maintain a stable value in relation to an official currency, or in relation to one or several assets, via protocols, that provide for the increase or decrease in the supply of such crypto- assets in response to changes in demand.”

Let’s then have a closer look at what ARTs (Title III of MiCAR) and EMTs (Title IV of MiCAR) are and the regime they are subject to.

What are ARTs and EMTs and their main use cases?

Definitions and key distinction

On the one hand, an ART is defined in Article 3(6) of MiCAR as “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”. An EMT, on the other hand, is defined in Article 3(7) of MiCAR as “a type of crypto-asset that purports to maintain a stable value by referencing the value of one official currency”.

While sharing many of the same features, the key difference between ARTs and EMTs lies in the type of reference assets they are pegged to. While EMTs may be pegged only to a single official currency, ARTs may be pegged to several types of assets, including official currencies, baskets of goods, commodities, other crypto-assets, a combination of such assets or even possibly financial instruments.

Use cases for EMTs / ARTs

An EMT’s main use cases are clearly spelled out in MiCAR’s recitals, particularly in Recital 18 of MiCAR which indicates that “the function of [an EMT] is very similar to the function of electronic money as defined in Directive 2009/110/EC [EMD2]. Like electronic money, such crypto-assets are electronic surrogates for coins and banknotes and are likely to be used for making payments”, as well as in Recital 64 of MiCAR providing that an EMT’s “main purpose [...] is to be used as a means of payment […]”.

MiCAR is less clear as to the functionalities of ARTs. Nevertheless, these tokens may be used as a means of exchange (i.e. payment), a means for storing value and/or as a means of access to a good or service (which is also the main function of utility tokens). It should be noted that their primary use case should remain as a means of exchange, according to Recital 58 of MiCAR which indicates that the prohibition to grant interest with regards to ARTs (explained below) aims at “[reducing] the risk that [ARTs] are used as a store of value [...]” (and therefore that issuers should not substitute State currencies and banks in that regard).

Comparative regime of ARTs and EMTs under MiCAR

The regulatory regime and treatment of ARTs and EMTs are substantially aligned under MiCAR. There are, however, certain differences, stemming mostly from their nature (particularly from the fact that EMTs are assimilated to e-money, whereas ARTs represent a new form of instrument introduced in the EU legal and regulatory framework) and different risk levels (ARTs are considered riskier, due to the broader base of assets on which they can be pegged). For example:

− Unlike EMTs, ARTs are subject to issuance reporting and restrictions, in order to prevent them from becoming widely adopted as a means of payment and settlement of transaction (Recital 61 MiCAR and Articles 22 and 23 MiCAR);

− With certain exceptions, EMTs are subject (by way of cross-references under MiCAR) to the Second Electronic Money Directive (EMD2) regulatory requirements, which are overall less strict than the corresponding requirements set out in MiCAR for ARTs; and

− Issuances of ARTs are subject to specific requirements regarding the reserve of assets, which are overall stricter than the EMD2 safeguarding requirements that are applicable to EMTs. Only “significant” EMTs are subject to similar reserve of assets requirements.

Sensitive issues/points to note in the use of ARTs/EMTs

Whilst MiCAR aims to set out a comprehensive regime for ARTs and EMTs, a number of sensitive points remain, potentially leading to challenges for future issuances of stablecoins, such as:

− The broader crypto-asset regulatory framework: MiCAR is complemented by other ongoing EU legislative initiatives, such the European Commission’s proposed anti-money laundering and countering the financing of terrorism (AML/CTF)¹ legislative package (intended to replace the current Fourth Anti-Money Laundering Directive, as amended) and the EU’s proposed payment services package (PSD3/PSR1). ²The blurred interplay between MiCAR requirements and those in the AML/CTF and the PSD3/PSR1 packages may lead to challenges both for subject entities as well as supervisory authorities, such as:

− Traceability and due diligence requirements: due to the very nature of stablecoins (which are crypto-assets), the traceability of parties and due diligence monitoring of transfers on the secondary market may prove difficult (and in some cases impossible) for their issuers to achieve in practice. This may lead to challenges in ensuring compliance by both issuers and crypto-asset service providers (CASPs) with AML/CTF requirements (including the applicability of the recast Transfer of Funds Regulation (Regulation (EU) 2023/1113) which now covers transfers of crypto-assets); and

− EMTs are considered as e-money under EMD2 and as such qualify as “funds” for the purposes of EMD2 and the Second Payment Services Directive, a position which is clarified in the proposed PSD3/PSR1 package. It is unclear how certain requirements (such as strong customer authentication or liability requirements) under the PSD3/PSR1 framework will apply to EMTs.

− The consistency between MiCAR requirements and other existing requirements: breaches of MiCAR requirements related to ARTs and EMTs may risk contaminating the other banking and/or e-money businesses of issuers (credit institutions and electronic money institutions). The isolation of the crypto-business from the already existing regulated activities may need to be carefully considered by issuers.

− The competition of other innovations such as CBDCs: with the advent of the ECB’s digital Euro, it is unclear whether private stablecoin projects will achieve scaling and gain significant market share or whether they will rather remain more closed-loop solutions.³

Requirements applicable to ARTs and EMTs

MiCAR caters for a relatively comprehensive and complex regime for the issuance of ARTs. To a large extent, the same considerations will be relevant for EMTs, with certain exceptions, due to the fact that EMTs are a particular form of e-money and will continue to be governed, where relevant, by EMD2. The following table aims to summarise these requirements in a short and easy-to-grasp format.

As of today, this regime is being developed through the consultation and drafting of regulatory technical standards and implementing technical standards at the level of the European Banking Authority (EBA)⁴ to specify, among others, the authorisation regime, change of control requirements and complaints handling, and more detailed rules will continue to take shape before the EU is ready to see the first stablecoin issued under MiCAR.

The industry is following these developments closely and it will most likely be a race for the first approval of either an ART or EMT under MiCAR to take a decisive lead in this competitive space.

Footnotes

^{1. Published on 20 July 2021. The recast Transfer of Funds Regulation (Regulation (EU) 2023/1113) was published in the Official Journal on the 9 June 2023. The other acts comprising the package (particularly the draft AML Regulation, the draft AML Directive and the draft Regulation setting up the EU AML Agency are still under discussion at EU institutional level.}

^{2. Published on 28 June 2023.}

^{3. In its current proposal, the ECB’s digital Euro would be accessible to both retail users as well as companies. Nevertheless, the envisaged main use case targets retail transactions (see ECB’s publication dated 18 October 2023. https://www.ecb.europa.eu/paym/digital_euro/investigation/profuse/shared/files/dedocs/ecb.dedocs231018.en.pdf}

^{4. A number of consultation papers have been published by the EBA, including, on complaints handling procedures for issuers of ARTs, on information for authorisation as issuers of ARTs, on information for assessment of a proposed acquisition of qualifying holdings in issuers of ARTs etc. A list of consultation papers can be found here: https://www.eba.europa.eu/markets-crypto-assets.}

Subject to specific criteria, ARTs and EMTs may qualify as "significant", triggering certain regulatory consequences (from a supervisory and prudential regime).

^{9. The criteria set out in Article 43(1) are:
– the number of holders of the ART/EMT is larger than 10m;
– the value of the ART/EMT issued, its market capitalisation or the size of the reserve of assets of the issuer is higher than EUR 5m;
– the average number and average aggregate value of transactions in that ART/EMT per day during the relevant period, is higher than 2.5m transactions and EUR 500m respectively;
– the issuer is a provider of core platform services designated as a gatekeeper in accordance with Regulation (EU) 2022/1925;
– the significance of the activities of the issuer on an international scale, including the use of the ART/EMT for payments and remittances;
– the interconnectedness of the ART/EMT or its issuers with the financial system;
– the fact that the same issuer issues at least one additional ART/EMT and provides at least one crypto-asset service.}

^{10. The notification and assessment process is comprised of the following steps:
– Notification by NCAs to EBA, ECB and other central banks (as appropriate)
– NCAs shall report to EBA and the ECB information relevant for the assessment of the fulfilment of the classification criteria. With regards to issuers established in Member States outside of the Eurozone, NCAs shall also report to the central bank of that Member State.
– EBA's draft decision
EBA will prepare a draft decision on the classification of the ART/EMT as "significant" and notify it to the issuer, the NCAs, the ECB and, where applicable, to non-Eurozone central banks.
Issuers, NCAs, the ECB and, where applicable, to non-Eurozone central banks have 20 working days to provide comments to the EBA on the draft decision.
– EBA's final decision
EBA shall take its final decision on the classification of ART/EMT as significant within 60 working days of the date of notification of the draft notification.
– Ongoing assessment of "significant" status
EBA shall annually reassess the classification as "significant" of ART/EMT. Where a token no longer fulfils the classification criteria, the EBA shall prepare a draft decision and notify it to the issuer, the NCAs, the ECB and, where applicable, to non-Eurozone central banks. A decisional process similar to the above will be followed.}

 The regimes applicable to "significant" ARTs and "significant" EMTs are substantially similar under MiCAR, as illustrated in the table below.