In-depth analysis and latest adjustments to the EU MiCA Act's restrictions on the use of stablecoins

Recently, Aiying has observed that some news reports have expressed concerns about the stablecoin restrictions in the EU's Markets in Crypto-Assets Regulation (MiCAR). The stablecoin-related regulations came into effect at the end of June and do have some severe restrictions, and once the limits are reached, stablecoin activities must cease. However, these restrictions are mainly aimed at payments for everyday goods and services, not cryptocurrency trading or investment.

1. Specific regulations on the use of stablecoins

The EU's position is that if you want to use stablecoins to buy cryptocurrencies or conduct decentralized finance (DeFi) activities, that's completely fine. But if you want to use stablecoins to buy coffee or pay rent, you must use euro (or other EU currency) stablecoins. These restrictions are mainly to protect monetary sovereignty. This was detailed in Aiying's previous article "European MiCA Act 10,000-word Research Report: Comprehensive Interpretation of the Far-reaching Impact on the Web3 Industry, DeFi, Stablecoins and ICO Projects": The EU Crypto Asset Market Regulation (MiCAR) sets detailed regulations and restrictions on the use of stablecoins. Here are the main contents: Relaxed regulations for cryptocurrencies and DeFi: MiCAR allows the use of stablecoins for cryptocurrency transactions and decentralized finance (DeFi) activities without special restrictions. This means that if you want to use stablecoins to buy cryptocurrencies or conduct DeFi activities, it is completely possible. Strict restrictions on payment for goods and services: If stablecoins are used to pay for daily goods and services (such as buying coffee or paying rent), the use of euro (or other EU currency) stablecoins is required. These restrictions are mainly aimed at protecting the EU's monetary sovereignty and preventing foreign currency stablecoins from excessively affecting the EU's monetary system.

Therefore, the EU has no restrictions on electronic money style stablecoins for the euro or other EU currencies, but there are restrictions on foreign currency electronic money tokens (EMTs) and asset referenced stablecoins (ARTs). For example, Facebook's Libra/Diem is an ART stablecoin that is pegged to multiple currencies, commodities or other assets. Aiying Aiying thinks this is understandable, because if foreign currency stablecoins (such as US dollar stablecoins) are used in large quantities in the EU, this will make the EU's financial system affected by external monetary policy and economic conditions. For example, if the US dollar's monetary policy changes, this change may affect the economic and financial stability within the EU through the channel of stablecoins.

II. Analysis of specific limit scenarios

According to MiCAR, if a foreign currency electronic money token (EMTs) or asset-referenced stablecoin (ARTs) is used in more than 1 million transactions per day or the total transaction amount exceeds 200 million euros in a single currency area, the issuance of the stablecoin must be stopped.

1. Understanding the limit

To better understand this limit, we can compare the transaction volume of major stablecoins in the current market. For example, Tether (USDT) has a daily transaction volume of between 15 billion and 67 billion US dollars in June 2023. However, it should be noted that the vast majority of these transactions are for cryptocurrency transactions, not real-world payments. Therefore, these cryptocurrency transactions are not counted in the 200 million euro limit stipulated by MiCAR, because the limit only applies to real-world payments within the EU.

2. Exclusion of transactions from the limit

In the final draft rules, several categories of transactions are excluded from the limit, including:

• Transactions where one party to the transaction is outside the EU

• Investment-related transactions (not limited to cryptocurrency investments, but also other investments)

The existence of these exclusions indicates that the main goal of the MiCAR regulation is to control the use of stablecoins for daily payments within the EU, rather than to restrict their financial and investment activities worldwide.

III. Exchange means for asset-referenced stablecoins (ARTs)

In the context of the MiCAR Regulation, “exchange means” refers to the way in which asset-referenced stablecoins (ARTs) are used in various trading activities. The EBA provides clear explanations on which transactions should be included in the total transaction volume and value of ARTs and which should not be included.

Types of transactions not included in “exchange means” The EBA explicitly states that the following types of transactions should not be included in the total transaction volume and value of ARTs:

1. Transactions involving the exchange of funds or other crypto-assets with an issuer or crypto-asset service provider (CASP): These transactions refer to the exchange of funds or crypto-assets in which the issuer or CASP directly participates and are not included in “exchange means”.

2. Transactions using ART as collateral for transactions in financial instruments: When ART is used as collateral or security for transactions in financial instruments, such transactions are not counted.

3. Transactions using ART to settle derivative contracts: This refers to transactions using ART to settle derivative contracts, which are also not counted as "transaction means".

4. Other transactions where the issuer has reasonable grounds to believe that the purpose of the corresponding transaction is not payment for goods or services: If the issuer can reasonably prove that certain transactions are not used for payment of goods or services, these transactions are also not counted.

These rules ensure that these limits do not hinder market activities from the perspective of tokenization of real-world assets. The preamble of MiCAR also discusses transactions using stablecoins as payment intermediary tools, such as retail payments made by cryptocurrency exchanges through Visa and Mastercard cards.

Fourth, EBA's adjustments and concessions

The European Banking Authority (EBA) has consulted on the implementation rules of the MiCAR Regulation and issued a summary of its response. The following is a detailed explanation:

EBA's concessions and adjustments

1. Data reporting requirements: In order to assess whether stablecoins have exceeded the limits set by MiCAR, the EBA requires stablecoin issuers to report data every quarter. These data include transaction volume and value to ensure that regulators can monitor and assess stablecoin market activities.

2. Data reporting of off-chain transactions: The MiCAR Regulation requires crypto asset service providers (CASPs) to provide data to stablecoin issuers, including their recorded off-chain transactions. This means that many crypto exchanges, while not conducted on the blockchain, still need to be reported to issuers to ensure that all relevant transactions are accounted for in total volume and value.

3. Transactions between non-custodial wallets:An important concession by the EBA is that it does not require issuers to report transactions between non-custodial wallets. Non-custodial wallets are cryptocurrency wallets where the user manages the private keys themselves and does not rely on third-party services.This arrangement reduces the regulatory burden on individuals and small businesses. For example, crypto companies use stablecoins to pay employees and freelancers, which technically counts as payments for goods and services. But because both parties to these payments use non-custodial wallets, these transactions are not counted towards the €200 million/day limit

Although the EBA has relaxed reporting requirements for transactions between non-custodial wallets, this does not mean that all transactions using non-custodial wallets can bypass the reporting obligation. This is because:

1. Limited scope of relaxation:

• The relaxation of the EBA is limited to transactions between non-custodial wallets, that is, these transactions do not need to be reported only when both parties to the transaction use non-custodial wallets.

• For transactions involving custodial wallets or other forms, the reporting obligation still exists.

• Regulation of large transactions:

• While small transactions can avoid reporting through non-custodial wallets, for large transactions, regulators may take additional measures to monitor and manage to prevent regulatory circumvention.

• For example, the EBA and other regulators may focus on the activities of exchanges and large market participants to ensure that they comply with relevant regulations.

• Technical means and legal framework:

• Regulators can use technical means to track large or suspicious transactions, even if these transactions are conducted through non-custodial wallets.

• The legal framework may also be further adjusted to address potential circumvention behavior and ensure the effectiveness of supervision and fairness of the market.

• Limitations in actual operation:

• For many businesses and users, it is not practical to rely entirely on non-custodial wallets for transactions. Although non-custodial wallets provide greater autonomy and privacy protection, they also require users to have certain technical capabilities and security awareness, which may be a challenge for ordinary users and small businesses.

In general, although the EBA's concessions do reduce the regulatory burden for some small and personal transactions, it is not realistic to completely bypass the reporting obligation. Regulators still have a variety of means and mechanisms to ensure market transparency and compliance.

Through a detailed analysis of the specific provisions and impacts of the EU's Market in Crypto Assets Regulation (MiCAR) on stablecoins, as well as the adjustments and concessions made by the European Banking Authority (EBA) during implementation, we can see that the MiCAR regulation aims to balance the relationship between innovation and regulation, including its flexibility and resilience, which is worthy of learning from other regions.

Reference Information:

• https://eur-lex.europa.eu/EN/legal-content/summary/european-crypto-assets-regulation-mica.html

• https://legal.pwc.de/en/news/articles/the-eus-markets-in-crypto-asset-regulation-micar

• https://www.esma.europa.eu/esmas-activities/digital-finance-and-innovation/markets-crypto-assets-regulation-mica

• https://www.eba.europa.eu/publications-and-media/press-releases/eba-publishes-regulatory-products-under-markets-crypto-assets-regulation-0

• https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32023R1114