Europe vs. Stablecoins: New Regulations

Will the future of stablecoins be forged in Europe or the USA? As regulators on both sides of the Atlantic grapple with establishing clear frameworks, this article unpacks the critical differences between the EUS MiCAR and the US’s GENIUS Act and their potential impact on the global stablecoin market. Discover how these distinct approaches might shape the future of crypto innovation and accessibility for years to come and which jurisdiction may emerge as the leader in the stablecoin revolution.

Stablecoin Showdown: Europe vs. the USA in the Race for Crypto Dominance

The regulatory landscape for stablecoins is undergoing a seismic shift, and the choices being made by the European Union and the United States are setting the stage for a potential power struggle in the crypto world. At the heart of this battle are stablecoins – digital assets pegged to stable values like the US dollar or the Euro – which have become the backbone of the entire crypto market, boasting a capitalization exceeding $160 billion.

The EU and the USA are taking drastically different approaches.The EU, with its Markets in crypto-Assets (MiCAR) regulation, has adopted a rigid stance. Conversely, the US, with the proposed GENIUS Act, is leaning towards a more flexible framework. This divergence could have meaningful implications, potentially leaving European users in a digital limbo while the US attracts innovation and investment.

The European Regulatory Wall: MiCAR and Its Rigidities

MiCAR’s entry into force has already sent ripples through the European crypto ecosystem. Several exchanges have delisted Tether (USDT), the world’s largest stablecoin, for European customers.

MiCAR categorizes stablecoins into two types: E-Money Tokens (EMTs), backed by a single official currency, and asset-Referenced Tokens (ARTs), backed by a basket of assets. The regulation imposes stringent requirements on both, prompting many operators to reconsider thier presence in the European market.

MiCAR’s core philosophy emphasizes monetary sovereignty, leading to restrictions that are seen as stifling innovation.

The chains That Suffocate Innovation and Advancement

MiCAR imposes several limitations that make it difficult for global stablecoin issuers to operate:

1. Quantitative Limits: Usage is capped at 1 million daily transactions and €200 million. These figures are minuscule compared to the daily trading volumes of Tether, which can range from $15 billion to $67 billion.
2. Reserve Localization: For EMTs, at least 60% of reserves must be held in European banks; for ARTs, at least 30%. This forces issuers to fragment their global reserve management.
3. Restrictions on Eligible Instruments: Reserves can only be invested in extremely conservative instruments, with limitations exceeding those applied to customary banks.
4. Quasi-Banking Authorization: Issuers must undergo complex authorization processes and dual-level supervision involving both European and national authorities.
5. Complex Crisis Management: Issuers must follow procedures borrowed from banking regulation, including the possibility of extraordinary administration and compulsory administrative liquidation.

The Tether Case: The Resilience of the Giant

Tether’s response to the European regulations has been telling.Paolo ardoino, CEO of Tether, has expressed a preference for focusing on less regulated and more profitable markets, such as Asia and Latin America.

This decision has immediate consequences for European users, who are increasingly cut off from access to the most liquid stablecoins, impacting their ability to operate effectively in the global crypto market.

The American Approach: the GENIUS Act and the Path of Adaptability

Across the Atlantic, the USA is taking a different approach. The GENIUS Act,recently passed by the Senate with bipartisan support,offers a more balanced regulatory framework.

The key differences between the US and European models are:

1. Broad and Inclusive Definition: The GENIUS Act defines “payment stablecoin” flexibly,encompassing various operational models.
2. diversified Authorization System: Three authorization paths are provided, adapting to the needs of different operators.
3. More Flexible Reserve Requirements: The 1:1 coverage obligation remains, but a wider range of assets is allowed in reserves.
4. Absence of Quantitative Limits: No arbitrary caps are imposed on stablecoin usage.
5. Greater Protection in Case of Insolvency: Stablecoin holders are granted priority claims in the event of issuer bankruptcy.

This approach aims to create security without stifling innovation.

The Consequences for the European Market: A Fragmented Ecosystem

The exclusion of global stablecoins from the regulated European market is already producing tangible effects:

1. Reduced Liquidity: European exchanges are seeing reduced liquidity as they remove trading pairs with USDT.
2. Increased Transactional Costs: Market fragmentation leads to wider spreads and higher costs for European operators.
3. migration to Unregulated Platforms: Experienced users are moving to non-European exchanges or DeFi solutions.
4. Competitive Disadvantage: European startups face regulatory barriers that their American competitors do not.

A “great exodus of non-compliant stablecoins” is occurring from the European market,potentially increasing the adoption of EU-native stablecoins. However, these may never achieve the liquidity and global reach of dollar alternatives.

The D.Lgs. 129/2024: An Entirely Italian complexity

In Italy, the D.Lgs. 129/2024, which implemented MiCAR, created a dual supervisory system involving Banca d’Italia and Consob. This regulatory layering adds further complexity for operators, who must interface with two different authorities, increasing compliance costs.This introduces unclear boundaries,which risks creating interpretative uncertainties and increasing compliance costs.

Monetary Sovereignty vs. Innovation and Market Openness: A False Dilemma?

The comparison between the European and American approaches highlights different regulatory philosophies: Europe prioritizes monetary sovereignty and financial stability; the United States balances consumer protection with financial innovation.

The choice of Tether to de facto abandon the regulated European market suggests that the current restrictions might be counterproductive.

what future for European Stablecoins?

While the United States seems to be positioning itself as the preferred jurisdiction for the issuance of global stablecoins, Europe risks ending up with a less competitive crypto ecosystem.

To avoid this marginalization, a revision of certain aspects of MiCAR is needed:

1. Reconsider the quantitative limits on the use of stablecoins.
2. Review the localization requirements of reserves.
3. Expand the range of eligible instruments for reserves.
4. Simplify authorization and supervision procedures.

A more pragmatic balance between regulation and innovation could allow Europe to remain competitive.

The Game is Still Open

The battle of stablecoins between Europe and the United States is emblematic of a broader challenge: how to effectively regulate digital financial innovation without stifling it. The American GENIUS Act outlines an option model that could better reconcile the needs of protection with those of innovation. Europe now faces a choice: persist on the path of regulatory rigidity, risking irrelevance in the future of digital finance, or rethink its approach to not permanently miss the train of financial innovation.

The challenge for European regulators will be to find a balance that protects consumers and financial stability without sacrificing the digital future of the continent.

Pro Tip: Stay informed about the evolving regulatory landscape by following industry news and expert analysis. This is a rapidly changing field, and staying ahead of the curve is crucial.

Did you know? Stablecoins are designed to maintain a stable value, typically pegged to a fiat currency like the US dollar. This stability makes them a popular choice for trading and storing value in the volatile crypto market.

Reader question: What are the potential long-term consequences if Europe fails to adapt its stablecoin regulations?