Letter to EU Council Against The Proposed MiCA Legislation

August 25, 2022

Darko Simunovski

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The European Union’s Markets in Crypto-Assets legislation could effectively ban dollar-pegged stablecoins like USDT and USDC in EU members, Blockchain for Europe have send letter to EU Council warning against the potential impact the proposed MiCA legislation could be severe for the crypto market, that can cause short-term volatility, fragmented liquidity and an exodus of crypto innovation from the EU. They also noted that the restrictions would incentivize users to use unregulated services outside of the EU and compromise the EU’s efforts to take advantage of the potential of crypto and blockchain.

The EU’s MiCA legislation proposes limiting issuance and use of tokens that are not denominated in an official currency of one of the union’s 27 member states. The proposal includes plans to introduce limits on tokens used as a means of exchange, something Blockchain for Europe and the Digital Euro Association have taken issue with since it could apply to stablecoins used for trading.

According to the letter sent to the EU Council, the key messages are:

-Stablecoins are at risk of being banned in the EU from 2024, due to quantitative limits on issuance and use of EMTs denominated in foreign currency under MiCA.
-USDT, USDC, and BUSD account for almost 75% of crypto trade volumes globally by
pair denomination. Restricting their use in the Euro area would cause destabilizing effects and a major outflow of crypto activities outside of the EU.
-EU crypto investors would likely face extreme short-term volatility in prices driven by
dislocation effects. In the medium- to long-term, fragmented liquidity would make trading
more expensive, reduce competition and drag down on innovation in the EU.
-Despite the momentum behind the EUR stablecoins, they account for a negligible
fraction of trading volumes. It is unrealistic to expect them to replace USD-referencing sablecoins in crypto trading, never mind doing so in a smooth manner by January 2024.

To avoid these negative consequences, there needs to be a clarification of the concept under MiCA to protect the role of USD-referencing stablecoins in enabling crypto trading and in providing liquidity to DeFi pools.

The European Commission’s Digital Finance Package was adopted on 24 September 2020 and includes, among several significant new strategies and proposals, a proposed Regulation on cryptoassets, the Markets in Crypto assets Regulation. MiCA will be directly applicable throughout the EEA, superseding any national regimes relating to crypto-assets. AML/CFT legislation is unaffected.
This comprehensive and stringent framework introduces significant regulatory control and oversight of previously unregulated areas of a crypto-asset industry that has, at times, seen both fraud and market abuse. Complying with MiCA, however, may present significant challenges, especially for those involved with DeFi projects.

Markets in Crypto-assets regulations(MiCA), MiCa’s Crypto-assets proposal has 4 objectives:

1. To provide legal certainty for crypto-assets not covered by existing EU financial services legislation, for which there is currently a clear need.
2. To establish uniform rules for crypto-asset service providers and issuers at EU level
3. To replace existing national frameworks applicable to crypto-assets not covered by existing EU financial services legislation
4. To establish specific rules for so-called ‘stablecoins’, including when these are e-money.

“3/13 Large stablecoins will be subject to strict operational and prudential rules, with restrictions if they are used widely as a means of payment, and a cap of 200€millions in transactions/day”

Stated Ernest Urtasun (@ernesturtasun) on 30th June.

These laws would place the European Union far less competitive location for crypto startups and therefore dissuading top tech talent from operating in EU countries. The biggest challenge for regulators is how to make balance between providing the necessary support for the ecosystem to flourish, without pushing away the innovation out of the EU market.

It is obvious that the European Union’s regulators are facing the lack of crypto experts required to enforce new rules regulating the crypto industry.

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