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The MiCA Effect: Stablecoins, Compliance Challenges, and Circle's Case Study

AMLBot Team

• 5 min read
The MiCA Effect: Stablecoins, Compliance Challenges, and Circle's Case Study

The  Markets in Crypto Assets Regulation (MiCA), partially enacted on June 30, 2024, aims to promote innovation by setting clear guidelines for crypto asset service providers throughout the EU. MiCA's primary objective is to create legal certainty for businesses operating within the crypto space while ensuring robust consumer protection. Its transparency and consumer protection measures could boost investor confidence, attract institutional investment, and foster market liquidity. 

Key Definitions and Classifications

MiCA defines crypto assets and classifies them into three categories:

  1. Asset-Referenced Tokens (ARTs): These tokens maintain a stable value by referencing another asset or a combination of assets, such as gold or a basket of currencies.
  2. Electronic Money Tokens (EMTs): These tokens maintain a stable value by referencing a single official currency.
  3. Other Tokens: This category includes crypto assets that do not fall under ARTs or EMTs, such as Bitcoin and Ether.

MiCA further differentiates ARTs and EMTs into significant and non-significant tokens based on criteria like the number of holders, the value of issued tokens, and the significance of the issuer's activities internationally.

Timeline of MiCA’s Implementation

Phased Implementation

  • June 30, 2024: Rules for stablecoin issuers come into effect, focusing on:
    • Asset-Referenced Tokens (ARTs).
    • E-Money Tokens (EMTs).
  • December 30, 2024: All other rules become applicable, including:
    • Regulations for issuers of crypto-assets other than ARTs/EMTs.
    • Rules for crypto-asset service providers (CASPs).
    • Measures to prevent market abuse.

Transitional Measures

  • Offers of Crypto-Assets: Offers ending before December 30, 2024, are exempt from certain obligations like publishing a crypto-asset white paper.
  • Admissions to Trading: There are limited requirements for admissions before December 30, 2024, such as the publication of white papers by December 31, 2027.
  • Issuers of ARTs: As part of the transitional measures, issuers who issued ARTs before 30 June 2024 will also have to comply with the new rules.
  • Simplified Procedure: Member States may decide not to apply the transitional regime for CASPs or to reduce its duration. For instance, on 14 July 2023 the Dutch legislator published a proposal for the MiCA implementation act (Uitvoeringswet verordening cryptoactiva, MiCA Implementation Act). This proposal intends to reduce the transition period for registered crypto service providers to 6 months. 

Please find more information about this development in our blog on the MiCA Implementation Act here.

Focus on Stablecoins as the First Segment to be Regulated

Stablecoins dominate crypto transaction volumes. In 2023, stablecoins accounted for 60% of the $10 trillion overall transaction volume on-chain. This translates to a global daily average of $17.4 billion transferred via stablecoins. 

The high transaction volume underscores the importance of stablecoins in the crypto market. Retail usage is substantial, with 91% of stablecoin transactions valued below $10,000, indicating a broad base of small-scale users. As such, MiCA’s focus on stablecoins is crucial for the regulatory framework.

Compliance Requirements for Stablecoin Issuers

From June 30, 2024, issuers of ARTs and EMTs that involve stablecoins must comply with MiCA regulations. This includes obtaining a MiCA license for publicly offering or trading these tokens within the EU. Here are the key requirements: 

  1. Transparency: Issuers must disclose detailed information through white papers, promoting transparency about the token’s structure, backing assets, and associated risks.
  2. Authorization Requirements: Companies offering services related to ARTs and EMTs must be authorized by one of the EU’s 27 national financial regulators. 
  3. Redemption Rights: Holders of e-money tokens should have the right to redeem their tokens at any time at par value in the referenced official currency.
  4. Marketing and Sales Regulations: MiCA enforces rigorous marketing and sales rules to prevent misleading practices and ensure that investors have access to reliable information.
  5. Backing Assets: Stablecoins must be backed by low-risk, liquid investments, fully segregated from the issuer’s own assets.
  6. Consumer Protection: Issuers must safeguard consumer funds and establish clear systems for information and support. Measures to prevent insider trading and market manipulation must be implemented, similar to traditional finance regulations.
  7. Preventing financial crimes: Issuers are required to adhere to stringent anti-money laundering (AML) and counter-terrorism financing (CTF) standards.
  8. Fit-and-proper test: Companies' directors/UBOs will have to pass a fit-and-proper test to assess suitability for those roles

Non-Euro-Denominated Stablecoins

MiCA places specific restrictions on non-euro-denominated stablecoins. If these stablecoins exceed a threshold of 1 million transactions or a value of 200 million euros per day, issuers must halt their issuance. This measure aims to maintain monetary stability within the EU and prevent potential disruptions caused by large-scale stablecoin transactions in non-euro denominations.

Circle: A Case Study

Circle, a prominent cryptocurrency firm known for its USD Coin (USDC), has recently achieved a significant milestone by obtaining registration as an Electronic Money Institution (EMI) in France. This achievement marks Circle as the first global stablecoin issuer to align fully with the European Union’s comprehensive Markets in Crypto Assets (MiCA) regulations. 

This regulatory approval enables Circle to issue its USDC and Euro Coin (EURC) tokens in a manner compliant with MiCA’s stablecoin regulations. 

Impact on the Stablecoin Market

USDC, already a leading stablecoin, has seen a notable increase in daily trading volume since Circle’s compliance announcement. This uptick suggests that the European market, which represents a substantial share of global cryptocurrency transactions, is likely to become a critical growth area for compliant stablecoins.

USDC Transaction Volumes Has Grown Over a Period of 12 Months (Source: CoinTelegraph)

With its EMI license, Circle can now extend its services beyond France to other EU countries, leveraging the "passporting" principle of MiCA. This principle allows crypto businesses to operate across the EU once they are licensed in one member state. 

In contrast, other stablecoins like Tether (USDT) have faced challenges due to the MiCA regulations, including a minor depeg from their usual value. The shift towards MiCA-compliant stablecoins may alter the current balance of power among top stablecoins, potentially impacting market dynamics.

Despite only accounting for 12% of the total volume, MiCA-compliant stablecoins are consistently growing. 

Further, the European Union accounts for 17.6% of global cryptocurrency transaction volume and is the world's second largest cryptocurrency economy. As a result, its global influence gives it significant leverage. Due to the rigorous regulatory framework, Europe may be able to attract more crypto businesses and institutional investors. 

Market Concerns and Adjustments

The new regulations have led to immediate responses from major players in the crypto market. Binance, one of the largest crypto exchanges, has preemptively restricted some services for users within the European Economic Area (EEA). 

Similarly, OKX, a Seychelles-based crypto exchange, has responded by delisting trading pairs for Tether (USDT) from its platform for EEA users. OKX will now only support trading pairs with EUR and USDC. 

“We are already witnessing that major centralized exchanges have sent communication to their users stating that some services in stablecoins will not be accessible for users from the EEA area,” said Niko Demchuk, Lawyer and Head of Compliance at AMLBot. “I would emphasize that their communication is very careful. They are still trying to understand how exactly MiCA affects their business and what type of services shall be stopped, limited or are not affected.”

This move reflects the uncertainty and adjustment period that many exchanges are undergoing as they align their operations with MiCA regulations. Crypto businesses not issuing stablecoins but providing services with them are facing challenges in determining their compliance strategies. Issues such as whether to delist or ban certain unregulated stablecoins are still being evaluated. 

For firms striving to meet MiCA’s stringent requirements, AMLBot offers critical support. Our solutions are designed to streamline compliance processes, making it easier for firms to navigate the complexities of MiCA. Visit our Crypto Compliance Consulting for more info.

By leveraging AMLBot’s capabilities, businesses can ensure they meet the rigorous standards set by MiCA, protecting themselves from potential regulatory pitfalls and enhancing their overall compliance posture.

As the market adapts, understanding the implications of MiCA will be crucial for maintaining compliance and staying ahead of regulatory developments.