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Why stablecoins could disappear from Europe

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Why stablecoins could disappear from Europe

Stablecoins are essential to the crypto ecosystem. The value-stable cryptocurrencies make up around 12 percent of the total market capitalization. Due to the same value stability, the possible uses in the volatile market environment are diverse, from trading to payments to asset protection.

The regulators of the European Union will use the digital coins with stable value in the currently discussed MiCA regulation but only neglected. Basically, the regulation should create a legal framework for the crypto sector. In the trialogue, the EU Council, Parliament and the Commission are discussing a uniform European line. Sometimes it is about the licensing of service providers, the supervision of market participants and the treatment of stablecoins.

Licensing requirement for providers of stablecoins

In principle, providers of stablecoins should seek a license in the EU and be subject to the supervision of European authorities. In addition, the institutions impose various obligations, such as the submission of a white paper, return rights, operational obligations, and capital reserves. In addition, the European Central Bank is to be given the right to veto the authorization process. Concepts like unsecured algorithmic stablecoins, like the last one collapsed TerraUSD (UST) would be banned from European crypto exchanges.

Interest ban on stablecoins

Much heavier, however, weighs a threatening one Interest ban on stablecoins in the EU. Accordingly, issuers and crypto providers in Europe should no longer grant interest to holders of the stable-value tokens for the holding period. Gone are the days when investors could earn double-digit interest by staking stablecoins like Tether (USDT) or USD Coin (USDC). With the measures, the union of states wants to ensure that cryptocurrencies with stable value are used as a medium of exchange and not as a store of value, writes the EU Parliament in its MiCA draft.

Transaction Thresholds

Thresholds are also to be introduced for stablecoins that are “mainly used as a means of payment”. Providers that exceed a daily transaction or trading volume should stop issuing new tokens and within 40 days supervisory authorities should present a concept for how these volumes can be reduced below the corresponding threshold values.

The Council defines this limit as one million transactions per day or 200 million euros in daily trading volume. The Commission recommends 2.5 million daily transactions or five billion euros daily trading volume.

In practice, there are already some examples in which stablecoins are also actively used as a means of payment, but as of today, hardly any coin has reached the specified threshold values. In the future, these limitations could deter providers of stablecoins from an EU license in a dynamic financial market such as the crypto sector, say industry experts.

Experts sound the alarm

Patrick Hansen takes a critical view of the EU’s regulatory initiative. on Twitter the crypto expert wrote:

For these two reasons, I cannot imagine that many providers will try to get an EU license. They would be at the mercy of the EU for the issue. In addition, the attractiveness of stablecoins would be reduced if crypto service providers can no longer offer returns.

Phillip Sandner believes that European crypto users will simply switch to non-EU licensing exchanges. The topic of stablecoins has become a political issue within the federation of states, according to the professor Frankfurt School of Finance & Management.

In my view, the EU’s regulatory approach to stablecoins poses significant risks for the crypto economy in Europe – from transaction thresholds to no interest on staking.

Meanwhile, the EU Parliament is trying to calm things down. Regarding the threshold values, the Berger MP’s office explained:

However, we would also like to emphasize that this paper is initially only a discussion paper by the Commission that has not been formally adopted; negotiations are ongoing and this specific point has not yet been discussed.

However, if the regulations were enforced, issuers of stablecoins could face a dilemma in the near future. Either seek a license under industry-damaging conditions or lose access to the European market altogether.

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