Provisional agreement on EU crypto asset regulation enhances stability and protections

Moody Rating Agency said that the Council of the European Union (EU) and European Parliament have reached a provisional agreement on proposals to regulate EU markets in crypto assets (MiCA), including stablecoin and unbacked crypto asset issuers,1 trading venues and wallets, and to introduce consumer protection measures and standards for stablecoins. It said “pending formal agreement by the Council and European Parliament, the regulations are likely to take effect within 18 months. The measures are credit positive. Greater oversight of stablecoin structures and liquidity requirements will likely stabilise and increase use of digital currency payments systems, and encourage technology innovation in the EU. The EU regulations are the first of their kind, with the US and the UK in the process of formalising specific rules2. 

“The overarching aim of MiCA is to provide greater investor protections to what has so far been a risky and volatile asset class. There will also be a EUR200 million cap on the volume of transactions per stablecoin. The regulations would help to address current gaps, aiming to prevent market abuse, fraudulent schemes and insider trading. Under the proposed rules, the European Banking Authority (EBA) will regulate EU-issued stablecoins. Issuers will be required to build reserves at a 1-to-1 ratio, including deposits, and will be subject to minimum liquidity requirements. Wallet protections will also make crypto asset service providers liable if they lose investors’ crypto assets due to hacks or operational failures that could have been prevented. 

“The EBA will also maintain a public register of non-compliant service providers. Stablecoin investors will be offered a claim on the issuer at any time, providing more stability to their value. MiCA will require explicit authorisation for service providers to operate in the EU and national authorities will have three months to authorise service providers. This harmonisation of oversight will open the way for firms to passport their services into the EU, a positive for exchange operators that may want to expand operations into the EU crypto asset space. Requiring authorisation also creates a barrier to entry to some innovative entities. Information on the largest and most widely used stablecoins will be shared by national authorities with the European Securities and Markets Authority (ESMA), which will have the authority to ban or restrict platforms in an effort to reduce bad actors’ ability to operate in the space. The measures also authorise ESMA to develop disclosure requirements for crypto service providers’ environmental and climate footprint”.