Article: Aiying

Recently, the upcoming "Markets in Crypto-Assets" (MiCA) regulation by the European Union has attracted widespread attention. This regulation will have a profound impact on the cryptocurrency industry, especially the stablecoin market. MiCA requires stablecoins backed by fiat currency to have sufficient liquidity reserves and obtain an "electronic money license." Additionally, it sets limits on stablecoin trading volume and other asset support requirements. June 30 is an important deadline, requiring exchanges to delist stablecoins that do not comply with the regulations.

Faced with the MiCA regulation, major cryptocurrency exchanges in the EU have taken measures. This week, Bitstamp announced the delisting of stablecoins that do not meet MiCA requirements, such as Tether's EURT, and communicated directly with affected customers. Binance has also restricted users from using unauthorized stablecoins and copy trading services, advising them to convert to compliant digital assets or fiat currency. In contrast, Coinbase has not taken explicit preventive measures but stated that it will continue to monitor the situation to ensure compliance with MiCA standards.

The implementation of the MiCA regulation has brought multiple challenges to the EU cryptocurrency market. Since most stablecoins are pegged to the US dollar, many stablecoins are expected to have difficulty meeting MiCA requirements in the short term, leading to restricted trading and decreased liquidity. Jasper De Maere, Research Director at Outlier Ventures, pointed out that the new regulations may limit the trading activities of European citizens and cryptocurrency investment opportunities, forcing businesses to reduce their activities in the EU, affecting industry innovation and consumer market access.

Despite the compliance challenges and market uncertainty brought by the MiCA regulation, it also provides legal clarity and investor protection. In the future, as more exchanges and stablecoin issuers adjust their strategies to comply with MiCA requirements, the EU cryptocurrency market is expected to continue to develop in a new regulatory environment. Industry experts believe that MiCA plays a positive role in providing legal clarity and protecting investors, and may become a model for international cryptocurrency regulation.

Previously, Aiying compiled an article titled "A Comprehensive Interpretation of the European MiCA Bill: Far-reaching Impact on the Web3 Industry, DeFi, Stablecoins, and ICO Projects." Below is an excerpt from the article:

Impact of the MiCA Bill

Impact 1: Delisting of Privacy Coins

Cryptocurrencies with built-in anonymity features (such as Monero, Zcash, etc., "privacy coins") will only be allowed to enter trading platforms if the token holders and their transaction history can be identified by CASPs or relevant regulatory authorities. As this is practically unachievable, it is expected that EU-regulated cryptocurrency exchanges will delist privacy coins from their products.

Impact 2: Easier Licensing for CASPs Licensed in Europe under MiCA

CASP licensed under national frameworks will benefit from a simplified MiCA authorization process and have up to 18 months to obtain the final MiCA license. For example, regulated crypto custodians in Germany may benefit from these simplified procedures and transitional measures. However, only CASPs with MiCA licenses will have the opportunity to provide services throughout the entire EU single market through so-called "cross-border licenses." This is why it is expected that most cryptocurrency companies will apply for MiCA authorization as soon as possible.

Impact 3: Unified European Market

MiCA regulations will bring unified regulation, enhance competitiveness, and drive institutional development. So far, EU cryptocurrency companies have had to apply to regulatory authorities in each member state if they want to serve the entire EU market, resulting in high costs and complexity. Under MiCA, the same binding EU requirements will apply to all 27 member states. Once a company obtains a MiCA license in one country, it will be able to provide licensed services throughout the entire EU single market through "cross-border licenses."

Impact 4: Restrictions on Offshore Companies, Benefits for EU Companies

After MiCA takes effect, offshore and unregulated companies will not be able to actively attract EU customers. Even the rules that foreign companies can accept customers in the EU under the initiative of EU users will become stricter. This means that regulated cryptocurrency companies under MiCA will capture more market share from these unregulated overseas competitors in the EU market.

Impact 5: MiCA Promotes Institutional Participation, Accelerates European Banks' Layout

MiCA may lead to increased institutional adoption and activity in the EU cryptocurrency market. According to Bloomberg's data, only 4% of European institutional funds are exposed to crypto assets. Regulatory uncertainty is one of the main concerns preventing institutions from entering this field. It is expected that major European banks will launch cryptocurrency asset services in the next 48 months, whether it is custody, trading, or the issuance of electronic currency tokens or asset reference tokens.

Impact 6: Impact of MiCA on Stablecoin Issuers

The new regulatory rules of MiCA will pose significant compliance challenges for stablecoin issuers represented by Tether, especially considering Tether's failure to fully disclose its reserve status and composition and its lack of comprehensive audits by authoritative independent institutions. Tether has also been involved in multiple lawsuits and investigations, including reaching a $18.5 million settlement with the New York Attorney General's Office and rumored investigations by the US Department of Justice for alleged bank fraud, money laundering, and illegal operations. In the future, stablecoin issuers represented by Tether will face significant compliance reform costs.

To address these challenges, Tether should actively advance its compliance process, establish good cooperation with EU regulatory agencies and third-party audit institutions to enhance its market reputation and competitiveness. Faced with increasingly stringent regulatory requirements, Tether has taken measures to advance its compliance process. For example, Tether recently announced a partnership with the Italian branch of BDO International, the world's fifth-largest accounting firm, which will be responsible for auditing the company's reserve guarantees and proof reports, and plans to change the frequency of audit report publication from quarterly to monthly.

Under the framework of MiCA, stablecoin issuance will become more compliant and transparent. Stablecoin issuers such as Tether need to accelerate their compliance processes to adapt to the new regulatory environment and maintain competitiveness in the EU market.

Impact 7: Impact of MiCA on DeFi

MiCA applies to enterprises—natural persons and legal entities, as well as "certain other enterprises." "Other enterprises" may include entities that are not legally established, but the EU has clarified that decentralized DAOs and protocols are not the new targets of this regulation. Section 22 of MiCA clarifies that "if crypto asset services are provided in a fully decentralized manner without any intermediaries, they should not fall within the scope of this regulation." This core statement has received multiple public statements of support from key officials of the European Commission and Parliament.

However, the devil is in the details. The bill proposes that even if some activities or services in a DeFi project are executed in a decentralized manner, MiCA may still apply. This means that if certain parts or aspects of a DeFi project are not fully decentralized, they may still need to comply with relevant MiCA regulations.

What degree of decentralization (technical, governance, legal, etc.) is required to be exempt? This is a subjective judgment that is not clear-cut. I expect some enforcement and litigation cases to revolve around this issue. The EU is generally reluctant to enforce its laws in other countries, but if some DeFi projects claim to be decentralized in name only but are actually centralized, and provide services in the European region or to EU users, the EU will pay special attention.

If DeFi projects want to be exempt:

• Prove complete decentralization (high threshold)
• Block EU users
• However, it is commendable that the EU has excluded truly decentralized DeFi projects when formulating regulations for traditional financial companies. If some aspects of MiCA could become global standards, it would be good news.

Impact 8: Challenges and Uncertainty

However, the actual success of MiCA highly depends on the implementation standards and enforcement practices formulated by EU regulatory agencies in the next 12-18 months. Some provisions may burden industry participants, and their full impact will only be evident after technical implementation standards provide practical operational guidelines.

Impact 9: High Compliance Costs and Hindered Innovation

Similar to the recent situation in Hong Kong, the high compliance costs lead to business exodus, and MiCA's compliance costs will also lead stablecoin issuers to bypass the EU. The disclosure requirements and responsibilities faced by exchanges are too burdensome to benefit consumers, making their products less competitive compared to offshore competitors. EU consumers will either be cut off from innovation or continue to use (and be exposed to) the largest offshore liquidity and utility pools. In addition, regulatory authorities may consider that most NFT and DeFi projects are actually within the scope of MiCA, requiring compliance—this is a door that the current preamble of MiCA still leaves open for interpretation. This will inevitably lead to the migration of teams and resources out of the EU.

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