MiCA and stablecoin regulation in the EU: key aspects

MiCA Regulation and Stablecoins in the EU: What You Need to Know

TL;DR: As of June 30, 2024, new rules for stablecoins—specifically Electronic Money Tokens (EMT) and Asset-Referenced Tokens (ART)—come into force in the EU under the MiCA regulation. Issuers are required to obtain a license, maintain 100% asset reserves, and undergo regular audits. While this enhances investor protection, it imposes significant costs on companies. Unregulated stablecoins risk being delisted from European exchanges.

Starting June 30, 2024, the European Union begins implementing new rules for stablecoins established by the Markets in Crypto-Assets (MiCA) Regulation. This article breaks down the key MiCA requirements, explains the difference between the main categories of stablecoins (EMT and ART), and offers practical recommendations for issuers, DeFi projects, and investors operating in the EU market.

Context: Why Was Regulation Necessary?

Stablecoins, with a market capitalization exceeding $130 billion at the beginning of 2024 (CoinGecko), have become a systemically important element of the crypto economy. The collapse of the Terra/UST algorithmic stablecoin in May 2022 exposed risks to financial stability and investors. The MiCA Regulation (EU 2023/1114) was the EU's response to this threat, aimed at creating a transparent and secure environment.

MiCA does not ban algorithmic stablecoins as a technology but sets strict reserve requirements for all tokens claiming value stability. Models that lack sufficient backing by real assets will be unable to comply with these rules and will effectively fall outside the EU's legal framework.

EMT and ART: Key Differences

MiCA introduces two main categories of regulated stablecoins:

Parameter	E-money tokens (EMT)	Asset-referenced tokens (ART)	Source (MiCA Article)
Peg/Reference	Tied to a single official currency (e.g., EUR, USD).	Tied to a basket of assets (currencies, commodities, other crypto-assets).	Articles 13, 48
License	Authorization as a credit institution or an Electronic Money Institution (EMI).	Authorization from a National Competent Authority (NCA) of an EU country.	Articles 48, 16
Reserves	100% reserve backing 1:1. At least 30% of reserves in separate accounts, the rest in high-liquidity, low-risk financial instruments.	100% reserve backing. Reserve composition must meet strict liquidity, diversification, and asset quality requirements.	Articles 54, 36
Own Funds	Defined by EMD2 Directive requirements (typically from €350,000).	At least €350,000 or 2% of the average amount of reserve assets (whichever is higher).	Articles 48(2), 35
Holders' Rights	Unconditional right to redemption at par value at any time without a fee.	Right to redemption using reserve assets or their cash equivalent.	Articles 53, 39
Restrictions	Prohibition on granting interest to holders.	Stricter oversight, especially if the token is deemed "significant."	Articles 50, 43

For illustration: Circle (USDC, EURC) and PayPal (PYUSD) are closer to the EMT model in structure. Tether (USDT), due to its diversified reserve composition, is closer to the ART model.

"Significant" Tokens and License "Passporting"

MiCA introduces two important mechanisms:

1. Passporting: A license obtained by an issuer in one EU member state grants the right to operate throughout the entire European Union without needing separate permits in each country.
2. "Significant" Token Status: An ART or EMT may be classified as "significant" if it meets at least three criteria (Articles 43, 56), including the number of holders (over 10 million), market capitalization (over €5 billion), or transaction volume. Such tokens fall under the direct supervision of the European Banking Authority (EBA), which entails stricter capital and risk management requirements.

Deadlines and Transitional Provisions

• June 30, 2024 — Rules for stablecoins (EMT and ART) come into force.
• December 30, 2024 — Rules for other crypto-assets and Crypto-Asset Service Providers (CASPs) come into force.
• Until June 30, 2026 — A transitional period applies to issuers already operating in the EU market. They must obtain a license to continue their activities.

Estimated Compliance Costs

According to industry expert estimates, the costs of MiCA compliance can be divided into three scenarios:

1. Startup (ART/EMT Issuance):

   • Legal services and licensing: €150k–€300k.
   • Capital: from €350k.
   • Audit and compliance: from €100k per year.
   • Total for launch: from €600k.

2. Medium-sized Issuer:

   • Operational expenses and legal support: €500k–€1M per year.
   • Capital: 2% of reserves (can reach millions of euros).
   • Total: €1M–€3M per year.

3. Large Issuer ("Significant" Token):

   • Costs can exceed €5M–€10M per year due to direct EBA supervision, increased capital requirements, and complex reporting systems.

Impact on DeFi and AML/CFT Requirements

1. Risks for Unregulated Stablecoins: It has been reported that major exchanges, such as Kraken and OKX, are considering delisting or restricting trade for stablecoins that do not comply with MiCA (e.g., USDT) for European users. This could lead to a decrease in liquidity in DeFi protocols (Aave, Curve) that utilize these assets.
2. Growth of Euro-Stablecoins: MiCA creates favorable conditions for regulated Euro-pegged stablecoins (e.g., Circle's EURC). They are likely to become key assets in the European DeFi segment.
3. Integration with KYC/AML: MiCA works in tandem with the Transfer of Funds Regulation (TFR), which extends the "travel rule" to crypto-assets. CASPs will be required to collect and transmit information about the sender and recipient of transactions, strengthening control over anonymity.

What Should Market Participants Do? A Brief Checklist

• For Stablecoin Issuers:

  1. Conduct a legal analysis of the token for MiCA compliance.
  2. Choose an EU jurisdiction for licensing.
  3. Prepare a white paper and establish processes for reserve management and reporting.

• For DeFi Projects:

  1. Audit used stablecoins for EU delisting risks.
  2. Consider integrating MiCA-compliant stablecoins (especially Euro-based).
  3. Prepare for integration with KYC solutions to comply with TFR requirements.

• For Investors and Users:

  1. Check if the stablecoin issuer holds an EU license.
  2. Be prepared for restricted access to unregulated tokens on centralized platforms.
  3. Prioritize tokens with transparent reserve structures and redemption rights.

Practical Plan: What to Do Before June 30, 2026

For Issuers and DeFi Projects:

• Phase 1: Audit and Strategy (Until end of 2024)

  • Priority: Conduct a full legal and technical audit of the product.
  • Actions: Determine if the token falls under the ART or EMT category. Choose a jurisdiction for licensing. Begin consultations with lawyers and regulators.

• Phase 2: Preparation and Application (2025)

  • Priority: Prepare the licensing document package.
  • Actions: Draft a white paper in accordance with MiCA requirements. Form the necessary capital. Develop internal policies (risk management, AML/CFT, reserve audits). Submit the application to the chosen national authority.

• Phase 3: Finalization and Launch (1st Half of 2026)

  • Priority: Complete the authorization process and prepare for operations.
  • Actions: Coordinate with the regulator to clarify application details. Conduct a final systems audit. Prepare marketing materials in compliance with MiCA standards.

Conclusion

The MiCA Regulation transforms the stablecoin market in the EU, setting high standards for reliability and investor protection. Issuers face a complex but necessary path toward legitimacy, and the European approach may become a blueprint for regulators worldwide.

Sources:

1. CoinGecko. Stablecoin Market Capitalization.
   https://www.coingecko.com/en/categories/stablecoins
2. Official Journal of the European Union. Regulation (EU) 2023/1114 on markets in crypto-assets (MiCA).
   https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex:32023R1114
3. European Banking Authority (EBA). EBA’s role under the Markets in Crypto-Assets Regulation (MiCA).
   https://www.eba.europa.eu/regulation-and-policy/market-risk/ebas-role-under-markets-crypto-assets-regulation-mica
4. European Securities and Markets Authority (ESMA). Markets in Crypto-Assets (MiCA).
   https://www.esma.europa.eu/esmas-activities/digital-finance-and-innovation/markets-crypto-assets-mica