By Erwin SOTIRI
December 2023
Stablecoins were designed to provide a solution to crypto market fluctuations. However, it quickly devolved into a competition to see who had the best digital currency solution. On the one hand the national reserves and central banks offering alternatives such as Central Bank Digital Currencies (CBDC) but on the other hand spectacular failure of private stable coins such as those of LUNA or FTX scarred the reputation of technology as a solution for crypto-economic stability.
Stablecoins are currently on the radar of regulators, particularly the SEC in the United States, but also in many other jurisdictions. Most crypto exchanges are probably aware by now that the United States may be the most difficult jurisdiction for stablecoins at the moment, as evidenced by legal actions and quiet bans on crypto.
It is not necessary to re-examine the "stablecoin as securities" narrative, which is likely as good as any other regulator narrative that can thrive in the absence of specific legislation addressing the issues.
The main issue here is, of course, crypto technology's ability to disrupt the financial sector, given the financial sector's (private and public) failure to adopt crypto technologies as solutions to economic developments.
The recent SEC's move to label BUSD as an unregistered security and ordering Paxos to stop minting new tokens may signal a wider war on all stablecoins. It seems that in the beginning 2023 stablecoins are in the middle of a crisis. However, as to quote Sun Tzu, ‘In the midst of chaos there is also opportunity’.
During this difficult period for crypto, the European Union has issued a set of lengthy-but-necessary regulations dubbed the Digital finance package, one of the goals of which is to reconcile the "frenemies" of the crypto space: the banking and investment sectors with crypto-tech industries.
MiCA and the Pilot Regime: The Future of Stablecoins in the EU Financial Sector
MiCA and Pilot regime are paving the way for stablecoins in the EU. These legal instruments not only support the survival of stablecoins but also foster the integration and growth of the financial sector in the crypto industry. With MiCA expected to enter into force in early 2023 and the Pilot regime allowing for exemptions from existing rules to test innovative solutions, the future looks promising for stablecoins in the EU.
Enforcing old laws enacted decades, if not centuries, ago can only be a band-aid solution to global problems. In my 2018 book "Précis sur les Crypto-monnaies," I speculated that efforts toward crypto-regulation must be at least at a regional level, such as the EU, because jurisdictional regulatory efforts were unlikely to succeed given the global nature of digital assets. Indeed, history has shown that digital assets cannot be recognised (or prohibited) by a single jurisdiction, nor can they be "naturally" self-regulated.
The EU bureaucratic machine's natural ability to grind legal texts faster than legal professionals learn about ChatGPT has become an essential asset in promoting not only crypto companies, but also a welcome shift from traditional finance actors to crypto.
The Digital Finance Package is a set of measures to promote innovation and competition in digital finance while mitigating risks. It comprises two strategies, the Digital Finance Strategy and the Retail Payments Strategy, and includes four legislative proposals such as the MICA regulation proposal (Market in Crypto Assets), the Pilot Regime regulation (currently in force), the DORA regulation (currently in force) and the Amending proposal (that is a collection of amendments of other EU directives in order to facilitate the adoption of the three previous regulations).
The Digital package is at this date the most elaborate legislative effort towards crypto adoption that is simultaneously applicable to 27 European countries.
MiCA: A chance to enter the EU crypto market with confidence
The lack of regulatory clarity is one of the most significant barriers to the adoption of cryptocurrencies by banks and investment funds. Traditional financial institutions are heavily regulated and must operate within a clear legal framework before entering any market. This legal framework is provided by the MiCA regulation, which provides investors with a set of rules to follow when dealing with cryptocurrencies. This clarity will make financial institutions feel more at ease about investing in and holding cryptocurrencies, knowing that they are doing so in a regulated environment.
Clients can now access custody and administration of crypto-assets on behalf of third parties, portfolio management, and crypto-asset advice via the MiCA framework.
Crypto-Revolution: MiCA Empowers Regulated Entities to Embrace Crypto Services
MiCA also makes this transition easier for regulated entities like credit institutions by allowing them to offer crypto asset services with a simple notification to the regulator.
Through a simple notification process, MiCA streamlines the process for credit institutions to offer crypto asset services to the regulator. This means that regulated entities, such as credit institutions, can provide crypto asset services without going through a lengthy authorization process if certain conditions are met.
Under certain conditions specified by MiCA regulation, credit institutions, for example, can provide custody and exchange services for cryptocurrencies, as well as other related activities such as payment services. Meeting MiCA's capital adequacy, governance, and risk management requirements, as well as anti-money laundering (AML) and counter-terrorist financing (CTF) regulations, are among these conditions.
To offer these services, financial institutions must notify their national regulator and provide a detailed description of the services they intend to offer, including risks and mitigation measures. The regulator will then review the notification and decide whether or not to accept it. If the notification is accepted, the credit institution can begin offering services.
This notification procedure makes it simpler and less onerous for financial institutions to provide crypto asset services. Because credit institutions are not required to go through a lengthy authorisation process, it allows for a more rapid and efficient transition to crypto asset services.
Furthermore, the MiCA regulation ensures a level playing field for all financial institutions operating in the EU. The rule applies to all financial institutions, regardless of size or location, creating a level playing field for crypto asset services.
Pilot Regime: a flexible and adaptive regulatory approach
The Digital finance package also establishes a sandbox regime for DLT (Distributed Ledger Technology) that can be used to trade and settle assets quickly and easily. The Pilot Regime for DLT market infrastructures (DLT MTFs, DLT SSs, and DLT TSSs) requires operators to adhere to financial services legislation and bear responsibility for any losses. DLT financial instruments admitted to DLT market infrastructures must abide by market abuse regulations, and temporary exemptions will be granted. Retail investors should have direct access to DLT MTFs if adequate safeguards are in place.
Operators of DLT market infrastructures must develop a business plan outlining how they will comply with EU regulations if they exit the pilot programme. They must also develop rules for the use of distributed ledger technology, provide information about their activities and how they differ from traditional market infrastructures, and have appropriate IT arrangements. If the business plan calls for the safekeeping of clients' assets, these must be kept separate from the operators' own. Finally, the operators must have a credible exit strategy in the event that the pilot regime is terminated.
Local regulators can grant operators of DLT market infrastructures a specific permission, allowing them to receive temporary exemptions from certain provisions of existing Union legislation. ESMA should issue a non-binding opinion on the requested exemptions or the adequacy of distributed ledger technology, with the goal of ensuring investor protection, market integrity, and financial stability.
MiCA is Luxembourg's opportunity to lead the way in EU’s crypto market
While the Digital package does not require much effort for its implementation in EU national jurisdiction - (Indeed EU regulations provisions are, with scarce exceptions, directly applicable in all 27 European member states) – it still requires preparation, in particular by the finance regulator, in order to be able to timely respond to requests for authorisations from the private sector.
Luxembourg already has a number of leading financial institutions and investment funds, and the country has a long history of innovation and forward-thinking regulation. With the implementation of MiCA, Luxembourg is in a unique position to become Europe's leading hub for crypto-assets.
One of Luxembourg's main advantages is its strong regulatory framework, which is known for being both stable and flexible. The country has a long history of creating and implementing novel regulatory frameworks, such as the Alternative Investment Fund Managers Directive (AIFMD) and the European Long-Term Investment Fund (ELTIF) regulation.
Luxembourg has also been a pioneer in adopting new technologies such as blockchain and distributed ledger technology (DLT). The country has launched initiatives to promote blockchain and DLT development, as well as a number of blockchain-focused incubators and accelerators.
Luxembourg has a diverse and vibrant financial industry, in addition to a strong regulatory framework and a forward-thinking approach to technology. The country is home to a number of international banks, asset managers, and investment funds, and it has a long history of serving as a cross-border investment hub.
Luxembourg is an ideal location for market participants operating in the crypto industry due to its strong regulatory framework, forward-thinking approach to technology, and diverse and vibrant financial industry.
Luxembourg is already positioning itself as a crypto-asset hub, with several leading financial institutions and investment funds launching crypto-focused products and services. The implementation of MiCA is likely to stimulate further innovation and growth in the crypto industry, and Luxembourg is well-positioned to lead the way.
Disclaimer: The information and opinions expressed in this article are for general informational purposes only and are not intended to be legal advice. As a lawyer, I have provided the contents of this article based on my personal understanding of the Markets in Crypto-assets (MiCA) regulation as of the date of writing. However, the information provided may not be complete or accurate and may not apply to your specific circumstances. Therefore, I strongly recommend that you seek legal advice from a qualified professional before taking any action in relation to the MiCA regulation or any other legal matter.
What do you think ?
Do you think MiCA is a game changer for non-EU players ?
Absolutely, it is a great opportunity
Probably not
I am not quite sure at the moment
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