An outline of how stablecoins fit within the current Dutch regulatory framework and the proposed Markets in Crypto-Assets Regulation (MiCA)
On 22 May 2010, the first 'real-world' bitcoin transaction was executed in the US state of Florida, by transferring 10,000 bitcoin for two pizzas. If these pizzas had been paid for with stablecoins, this would have likely avoided the regret of discovering that the transaction would be valued over hundreds of millions of euros 10 years later.
Over the last year, bitcoin, ethereum and other cryptocurrencies have significantly fluctuated in value and proven to be profitable or sometimes imprudent investments for crypto speculators. As a result, some cryptocurrencies seem to have surpassed their original goal as a means of payment by moving on to being seen as an investment-like asset. As a response to the volatility of such crypto-assets, stablecoins, which are designed to be inherently less volatile than other cryptocurrencies, have entered the crypto stage.
As the rise of stablecoins and other more reliable crypto-assets have further increased the popularity of the crypto market, the European Commission (EC) has proposed the MiCA for the purposes of regulating crypto-assets, including the use of stablecoins. The MiCA aims to regulate crypto-assets and related financial services that remain outside the scope of the existing European regulatory framework.
In this blog, we will briefly touch upon the regulatory framework for stablecoins under the MiCA, which which, together with an outline of the current Dutch regulatory framework, is discussed in more detail in our recent publication in the Dutch Journal for Financial Law (Tijdschrift voor Financieel Recht) available via the link below (in Dutch only).
Stablecoin or simply a stable coin?
Stablecoins are defined by the European Central Bank as digital units that rely on stabilisation tools to minimise price fluctuations. Naturally, the stablecoin derives its name from the stability in value it offers compared to volatile cryptocurrencies. Stablecoins can be pegged to a stable asset that has intrinsic value (eg gold) or be backed by a central issuer. An example is the private stablecoin tether, which is pegged to and backed by the US dollar. Generally speaking, the price stabilisation of a stablecoin may be achieved by a central issuer that buys or sells more of the pegged assets on its balance sheet, or by an autonomous (decentralised) algorithm that adjusts the mining-process (release) of cryptocurrency by tracking supply and demand.
(Future) regulation of stablecoins
Depending on the technical and functional design of the respective stablecoin, it may be subject to (relevant Dutch laws implementing) EU legislation, including AMLD5, MiFID2, PSD2, EMD2, UCITSD, AIFMD and/or the SIPS-regulation (of which only AMLD5 currently provides for a distinct regime for crypto-assets, focusing on virtual currencies). The MiCA will introduce a new bespoke regulatory regime for cryptocurrencies and stablecoins alike. Its applicability to stablecoins is dependent on whether the stablecoin qualifies as an 'asset-referenced token' or 'electronic money token'. With regard to stablecoins, we made the following four observations:
- The MiCA regime for electronic money tokens seems to favour e-money over electronic money tokens. The scope of the MiCA is limited to stablecoins that do not qualify as financial instruments under MiFID2 or electronic money under the EMD2. However, once a certain stablecoin qualifies as an electronic money token under MiCA, issuers of e-money-tokens may need to comply with both the EMD2 and the MiCA. As this implies that payment technologies that solely qualify as e-money would only need to comply with the requirements of the EMD2, such seems to contradict with the self-declared principle of the EC that EU financial services law cannot favour one specific technology over another.
- The definitions of asset-referenced and e-money-tokens do not fully seem to represent the technological reality. Some stablecoins may refer to one fiat currency (electronic money tokens), whereby the issuer may hold several fiat currencies, commodities or crypto-assets to stabilise the value of the token (asset-referenced tokens), such as the stablecoin dai. It is unclear whether such a stablecoin would need to adhere to the regime for electronic money tokens or asset-referenced tokens.
- It also seems somewhat unnecessary to use the element 'stable' as part of the definition of asset-referenced and electronic money tokens. The EC could simply mention that stablecoins should be backed by one or more other assets, as it is not crystal clear which assets are considered stable or at what point in time such stability would actually be achieved.
- There is currently no specific regime for stablecoins based on an algorithmic stabilisation mechanism under the MiCA. In our view, some of these types of stablecoin also have the potential to be widely adopted among the general public, therefore justifying a separate regime under the MiCA.
The EC has a done a great job by introducing the first bespoke regulatory framework for crypto-assets, but the current proposal for the MiCA still raises some questions. Just like ordering pineapple on a pizza.
For a more extensive discussion of the above topics, please refer to our recent publication in the Dutch Journal for Financial Law (Tijdschrift voor Financieel Recht), which is available via the link below (in Dutch only).