Disclaimer: The thoughts and opinions expressed in this article are solely those of the author and do not represent the thoughts and opinions of the editorial team at crypto.news.
In April 2023, the European Union unveiled a comprehensive piece of legislation aimed at bringing the crypto and blockchain industry under control. The introduction of the Markets in Crypto-Assets Regulation (MiCA) represents a groundbreaking initiative to establish a unified regulatory framework and clearer laws for crypto asset service providers and token issuers.
One particular provision of MiCA, which addresses stablecoins, has been hailed as a significant milestone in crypto regulation. Stablecoins have long been considered challenging to regulate due to their unclear classification and frequent use in cross-border transactions. Following the approval of this provision, Circle, the issuer of the USDC stablecoin, became the first stablecoin issuer to be officially recognized as compliant under the EU’s crypto legislation.
Circle’s newfound compliance status has sparked speculation about the implications of MiCA on the $160 billion stablecoin market and the broader crypto and web3 economy. While the main objective of regulating crypto is to protect investors by holding accountable organizations that issue digital assets and provide services, onboard new users, and foster innovation, it will take time to fully assess its impact.
The idea for MiCA originated from concerns raised during the wave of Initial Coin Offerings (ICOs) in 2017 and 2018. These concerns revolved around potential scams, fraud, and other manipulations that could threaten financial stability within the European Union. After extensive research, due diligence, and with good intentions, MiCA deserves recognition for its approach to balancing regulation with innovation, acknowledging the technological and business advantages of crypto and blockchain. Furthermore, MiCA strengthens stability, investor trust, transparency, and oversight through its comprehensive legal framework.
However, MiCA does have some shortcomings. While the regulatory framework acknowledges the importance of bridging crypto asset service providers and traditional finance, it falls short in providing guidance on how to make that a reality. The increasing intersection of traditional finance and digital assets has the potential to drive adoption and contribute to the maturation of the crypto ecosystem. However, MiCA imposes limitations on stablecoins that seem counterproductive.
Non-Euro-pegged stablecoins are prohibited from being used in transactions for goods and services and face daily restrictions on the number of transactions (up to one million) and their total value (€200 million). This places usage limits on leading stablecoins like USDC and USDT, even if they are certified as MiCA compliant. Since stablecoins play a crucial role in facilitating transactions, enabling decentralized finance (defi), and supporting various aspects of the industry, these restrictions could potentially impact liquidity and disrupt innovation and defi activities, undermining one of MiCA’s main objectives.
Furthermore, these limitations are compounded by MiCA’s lack of emphasis on interoperability, a pressing need within the industry. MiCA also appears uninterested in promoting crypto-fiat payment solutions, which are key avenues for enhancing liquidity and sparking innovation beyond the crypto realm.
While it is too early to predict the outcome of MiCA’s approach to stablecoins, European regulators can do more to address interoperability and cross-ecosystem payments to future-proof the economy and avoid market fragmentation. Cooperation with EU organizations like Horizon Europe and the European Innovation Council can help identify innovative startups that tackle the areas MiCA has overlooked.
For instance, Kima, a protocol for asset-agnostic, peer-to-peer money transfers and payments, offers an interoperable settlement layer for interchain and crypto-fiat transactions. By eliminating barriers between blockchains and between traditional financial instruments and blockchain networks or decentralized applications, Kima’s protocol enables developers to access greater liquidity. This also benefits non-crypto native users and financial institutions by facilitating the flow of funds in all directions.
MiCA is set to serve as the standard for crypto regulation, guiding other nations and economic blocs on how to regulate a rapidly growing, complex, and volatile market with significant potential. While it is essential to protect monetary interests, the EU should not overlook other factors that impact the industry’s growth.
The EU has demonstrated its willingness to adapt and study emerging trends, and in the fast-paced world of crypto, this is crucial to ensure appropriate measures are taken to safeguard investors and the integrity of the entire industry.
Read more: KYC and AML in MiCA rules: how will crypto change in 2025? | Opinion