US dollar stablecoins run crypto, but can MiCA change that?

European stablecoin issuers say new EU laws provide them an edge over dominant dollar-pegged stablecoins. But as big institutions stand to gain, startups may find themselves navigating tougher waters.

It will be an uphill battle to challenge the dollar dominance in stablecoin. According to data from DefiLlama, euro-pegged stablecoins make up a mere $318 million of stablecoin market cap, compared to the $123 billion in dollar-pegged stablecoins. Tether’s euro-pegged stablecoin EURT accounts for 45.8% of this.

Still, startups that DL News spoke to say that The EU’s landmark Markets in Crypto-Assets, or MiCA, could provide the necessary building blocks to change that.

Unstoppable Finance, a German firm best known for its Solana crypto wallet, is banking on MiCA regulation to provide the foundation for entrepreneurs to build a trusted euro stablecoin.

“It’s a legal framework that we can point to [to] say that we’re following the rules, we’re supervised by the EBA and by local regulators, and we’re audited so you can trust us,” co-founder Peter Grosskopf told DL News.

The EU adopted MiCA in May. The legislation mandates that stablecoin issuers maintain adequate reserves, enabling free redemptions for holders at any point. Preparations are underway for this rule, set to come into force by the end of 2024.

MiCA also restricts certain transactions within the euro area that use stablecoins of foreign currency to $200 million daily. Industry reactions have been mixed, with some outcry, but the real impact hinges on regulatory interpretations. Some speculate that the restriction might solely cover real-world payments.

Building trust

Others observe that these restrictions could further incentivise euro stablecoins.

“MiCa is a foundation to increase trust in Euro stablecoins,” Grosskopf told DL News. “It’s a legal framework that all the providers can point to and say ‘Hey, we’re following the rules, we’re supervised by the EBA and local regulators and we’re audited so you can trust us.’”

Unstoppable believes that the regulation could pave the way for a Euro stablecoin to emerge. In May, it announced plans to build Europe’s first compliant “DeFi native bank” alongside a MiCA-compliant Euro stablecoin. Its banking arm will house reserves to ensure that its native stablecoin is fully backed.

On the face of it, a MiCA-compliant Euro stablecoin would have a one-up on the most widely-used Euro stablecoin, Tether’s EURT. Tether is rated a D for user safety by stablecoin ratings agency Bluechip due to its lack of auditing, clarity on where it holds its reserves and absence of regulatory protections, Vaidya Pallasena, Ratings Director at the agency, told DL News.

Icelandic startup Monerium, which holds an e-money licence, says that it created its euro-pegged stablecoin EURe with compliance and regulation in mind.

“Regulated, redeemable on demand by law — all of that good stuff, we had the foresight to build that straight in from the get-go,” Monerium’s co-founder and CTO Gísli Kristjánsson, told DL News.

So far, however, it’s only issued around €13 million in EURe, which pales in comparison to EURT’s market cap of €147.3 million.

Monerium is also working with blockchain company Gnosis for its GnosisPay debit cards that automatically convert digital assets into its stablecoin to settle real-world payments.

“Every time a card holder takes a card and touches it on a POS system, that will actually be escrowed on a smart contract in EURe,” explains Kristjánsson. “And then that EURe is settled with the Visa network and because we are regulated, we can talk to Visa as our peers.”

While Kristjánsson admitted that it’s likely going to be crypto-natives who initially use this card, he believes this is an example of a real-world use case that could increase Euro stablecoin adoption.

Hedging against the US crackdowns

Amidst US regulatory crackdowns on crypto, euro-pegged stablecoins appear to hold a distinct advantage.

Anne-Sophie Cissey, head of legal and compliance at Paris-based crypto market maker Flowdesk, said that the adoption of a euro-pegged stablecoin in the wider crypto ecosystem hedges against the risk of possible regulatory crackdowns on dollar-pegged stablecoins.

In February, the Securities and Exchange Commission served crypto service provider Paxos a Wells notice that told the firm to halt the minting of Binance’s BUSD stablecoin and labelled the coin an “unregistered security.” The SEC has also cracked down on crypto firms such as Kraken, Bittrex, and Nexo.

If the Biden administration were to continue its policy of enforcement over regulatory guidance regarding stablecoins, it could threaten the backbone of the crypto ecosystem. Stablecoins provide much of the liquidity in crypto markets, but have been widely criticised for lacking regulatory oversight and clarity on their reserves.

“If you’re a regulated stablecoin, you’re legit in a world where today even USDC is in a little bit of a grey zone,” Ivan De Lastours, blockchain lead at French sovereign wealth fund Bpifrance, told DL News. “The Office of Foreign Assets Control could always intervene [into USDC].”

Some suggest that the regulation was designed with institutions — rather than startups — in mind.

By contrast, Jeremy Allaire, the CEO of USDC issuer Circle, recently talked up a stablecoin bill currently being pushed through Capitol Hill that would be “very powerful for the US, the US dollar [and] industry competitiveness.”

Indeed, financial heavyweights, rather than startups, are some of the early driving forces of Euro stablecoins, with Societe Generale’s crypto division Forge unveiling its Ethereum-based Euro stablecoin EURCV for institutional clients in July.

“Circle will need to have a partnership with another institution or launch themselves as a banking institution to keep a [stablecoin] reserve,” says Flowdesk’s Cissey.

In March, Circle committed to onshoreing its euro-backed stablecoin EuroC.

“If EuroC is regulated in Europe, then that’s great news because you have a very legitimate asset to trade with,” BpiFrance’s De Lastours said. “If it takes time or if it’s complicated, then it would seem that Europe has a fear of regulating the space.”