Today, the European Banking Authority (EBA) published the first consultation paper on the methodology to estimate the number and value of transactions associated with e-money tokens denominated in a currency that is not an official currency of a Member State.
Table of Contents
Open Table of Contents
IMPORTANT FOR EU’S CRYPTO MARKETS
This is an important consultation paper for the crypto-markets in Europe, as MiCAR states that if a non-EU currency stablecoin whose “means of exchange” volume is higher than 1 million transactions per quarter and EUR 200 000 000 per day the issuer shall stop issuing the token.
In other words, large non-EU currency stablecoins – which are key to the currency crypto market structures – would be de facto banned in the EU.
There has, however, been a but: what are “means of exchange” transactions?
With the publication, we have the first glimpse into the answer. While the answer is not final and is subject to a consultation period, the answer seems to indicate that leading USD stablecoins such as USDT and USDC could no longer be offered or marketed to Europeans.
UNPACKING THE PAPER
Let’s unpack the most important points in the paper (emphasis my own, only partial texts included):
Point 15 states “In developing the draft RTS, the EBA took into account the objectives of Articles 22(1), point (d) and 23(1) of MiCAR, which, in the EBA’s view, are to monitor and prevent risks that the wide use of ARTs and of EMTs denominated in a non-EU currency as a means of exchange may have on monetary policy transmission and monetary sovereignty within the EU, through currency substitution effects”.
This means that the EBA, in this consultation paper, aims to support the EU’s monetary policy transmission mechanisms and sovereignty when consumers may have access to other alternatives via blockchain-based systems. This is a sensible extension to any central bank mandate/aim, and I believe it will be echoed elsewhere in the world as well.
Point 18: “In the EBA’s view, it follows from the above that the definition of “transactions” in Article 22(1) of MiCAR includes both transactions settled on a distributed ledger (‘on-chain’) and transactions settled outside a distributed ledger (‘off-chain’). Furthermore, in the EBA’s view, transfers between different addresses or accounts of the same person do not qualify as a “transaction” within the meaning of Article 22(1) of MiCAR and therefore should be excluded from the scope of the reporting in Article 22(1), point (d) of MiCAR”
This point clarifies that EBA will count all actual value transfers between two different entities, be it natural or legal persons, as transactions – regardless of in which system the transaction was settled or how the transactions took place. Tech-neutral approach.
Point 20: “In the EBA’s view, it follows from the above that the transactions associated to uses of an ART or of an EMT denominated in a non-EU currency “as a means of exchange”, as referred to in Article 22(1), point (d) of MiCAR, include transactions where such tokens are used to pay for goods or services, irrespective of whether the payment is made to a merchant or any other payee (legal or natural person). This excludes the exchange of an ART or of an EMT denominated in a non-EU currency for funds or other crypto-assets with the issuer or with a cryptoasset service provider, unless the respective ART or the EMT is used for the settlement of transactions in other crypto-assets.”
This is the most pertinent part to unpack. The first highlighted part is rather straight forward: if you pay for goods or services with a stablecoin, it should count towards the limits.
The second part is a bit more complex. It excludes transactions where stablecoins are exchanged for funds or other crypto-assets with the issuer or with a CASP. So, if you are exchanging a stablecoin for funds at a regulated exchange or with the issuer directly, it is not counted. So when I buy a stablecoin with euros at Kraken, it does not count. When I sell a stablecoin for Ether at Coinbase, it does not count. However, there’s a but.
Reading the sentence further, there’s an exception to the exception, so the above transactions will be counted IF the stablecoin itself is used for the settlement (when not dealing with funds).
Putting this into a concrete example; when I buy or sell the stablecoin for euros with the issuer or at a regulated exchange, it does not count. When I use the stablecoin itself to purchase another crypto-asset, it does count.
This makes sense. If you are just changing your cash into a blockchain-native version of the same asset, it shouldn’t be considered a transaction. However, if you are exchanging that blockchain-native version of cash into something completely different, it should count.
Point 24: “As regards the geographical scope of the transactions covered by Article 22(1), point (d) of MiCAR, in the EBA’s view, having discussed with the European Commission, the most reasonable interpretation of MiCAR is that the reporting in Article 22(1), point (d) covers only transactions where at least the payer or the payee is located in the EU, and excludes transactions where both the payer and the payee are located outside the EU.“
There was also an important geographical component – “within a single currency area” – to the application of the rules. Here the EBA clarifies that if even a single leg of transaction touches the EU, it should count.
Personally, this again makes perfect sense. The EU shouldn’t be policing third-countries. We are not the U.S. after all.
Point 36: “the most reasonable interpretation of MiCAR is that the obligation in Article 23(1) for the issuer to stop issuing the token applies once the caps in Article 23(1) are reached for a single currency area within the EU, but not when the caps are reached in a single currency area outside the EU, and not in a single currency area within the EU.“
Here, the EBA clarifies that non-EU currency stablecoins are not at risk for whatever they do outside of the EU. Again, this makes perfect sense and allows for usage of these assets outside of the EU.
By derivation from Point 55, Point 50 states: “to not require issuers to report under Article 22(1), point (d) of MiCAR transactions between non-custodial wallets or between other types of distributed ledger addresses where there is no CASP involved, and to include instead in the ITS under Article 22(7) of MiCAR a requirement for issuers to report under Article 22(1), point (c) of MiCAR (i) the number and value of such transactions (on a best efforts basis), as well as (ii) the number and value of all transfers between non-custodial wallets or between other types of distributed ledger addresses where there is no CASP involved”
In plain language, the EBA decided not to deal with DLT issues at this point in time. So, if there’s no CASP involved, there are no transactions to count.
CONCLUSION
The EBA’s guidance is very balanced and I welcome their input and conclusions. I cannot even imagine how much work it has been unpacking the smallest details in MiCAR.
Based on data from CoinMarketCap, USDT and USDC issuance would need to stop. The volumes and transaction counts exceed the limits by large margins. This means that the stablecoins you are likely using today will not be available in your favourite venues a year from now.
However, we are only at the consultation stage and far from this becoming law. So much can still change. The EU’s crypto markets need a new, compliant stablecoin. Incidentally, I happen to be building one at Membrane Finance. We issue a MiCAR-compatible euro-stablecoin. If you’d like to learn more, visit euroe.com.
If you want to know more about MiCAR, I co-authored an article with Patrik Elias Johansson earlier this year – available on the EUROe Blog.
CALL TO ACTION
The consultation paper is public and you can respond to it until 8 Feb. The final draft regulatory technical standards (RTS) will then be submitted to the European Commission for endorsement. The European Parliament and Council will scrutinise it and it’ll then get published in the Official Journal of the European Union – implementing the RTS.
Find the full consultation paper here.
DISCLOSURES
I work for a MiCAR-compatible euro-stablecoin issuer, Membrane Finance. We issue EUROe, an EU-based, European stablecoin built by Europeans for Europeans. I am a Europe-maxi and I’d like to see European companies reclaim our monetary sovereignty.
This article was edited 9 November 2023 to change conclusions regarding points 50, 55. If you want to see the conversation related to this point, please see here.