Crypto Regulation Weekly: EU’s Landmark MiCA Legislation Hits Stablecoins Hard

The European Parliament and European Commission wrapped up negotiations on the EU’s landmark Markets in Crypto Assets (MiCA) regulation bill.

It’s taken four years and more than a few fights to reach an agreement on the legislation. While it’s missing a few major areas of the digital asset industry, most notably decentralized finance (DeFi) and nonfungible tokens (NFTs), which will be covered by separate legislation, MiCA covers a great deal.

See also: EU Agreement on Crypto Regulation Limits Stablecoins, Leaves Out NFTs and DeFi

“Today, we put order in the Wild West of crypto assets and set clear rules for a harmonized market that will provide legal certainty for crypto asset issuers, guarantee equal rights for service providers and ensure high standards for consumers and investors,” said Stefan Berger, the European Parliament’s (EP) lead negotiator, on June 30.

But it’s worth noting that the text of the bill has not been released, and an agreement among negotiators is not necessarily the final word in the EU’s complex legislative process.

One key point empowers the European Securities and Markets Authority (ESMA) to supervise and regulate the crypto trading market, including “intervention power” over crypto-asset service providers (CASPs) if they fail to provide sufficient investor protections, threaten market integrity or threaten financial stability.

Crypto issuers will also be required to produce a whitepaper, providing investors with transparency and sufficient warning about potential losses, an important thread running throughout the discussions. Stablecoin issuers will be required to back their tokens one-to-one with euros and follow stringent auditing rules.

Wallet custodians, including exchanges, will be liable for hack losses or damages “to customers because of hacks or operational failures that they could have prevented,” according to global law firm Clifford Chance. “Cryptoassets will be protected in case of insolvency of the exchange.”

While a ban on bitcoin’s energy-intensive proof-of-work mining mechanism was beaten back, firms will have to publicize their energy use and environmental impact.

Last-minute surprises included a tough cap on stablecoins, banning the issuance of any more tokens if the stablecoin surpasses a daily spending limit of 200 million euro. The European Banking Authority (EBA) will supervise stablecoins with more than 10 million users or 5 billion euros in circulation.

A big loss for crypto industry lobbyists was the last-minute addition of a regulation requiring the collection of anti-money laundering (AML) personal data in any transaction of more than 1,000 euros between private unhosted digital wallets, and any transactions to or from an exchange-hosted wallet. Opponents say the latter is not only impractical but may violate EU privacy laws.

The European Central Bank (ECB) advised national regulators to harmonize their rules until MiCA comes into effect in 18 months.

See more: ECB Says Patchy EU Crypto Regulations Raise Risks

Basel Backs 1%

Banks should be forced to cap their holdings of unbacked (by fiat or fiat-backed stablecoins) crypto assets at 1% of its capital reserves, the Bank of International Settlements’ (BIS) Basel Committee on Banking Supervision recommended on June 30.

Also read: Basel Committee Hands Down Crypto Guidance for Banks

Advocating a conservative approach, the committee opened its proposal for public comments until Sept. 1.

The policy follows an earlier attempt a year ago, when the BIS recommended requiring banks to maintain enough capital to cover losses on cryptocurrency holdings in full.

UK Seeks Stricter Rules

The Bank of England’s Financial Policy Committee recommended the adoption of “enhanced regulation” of the cryptocurrency market.

The recent turmoil caused by the $48 billion collapse of a stablecoin “underscored the need for enhanced regulatory and law enforcement frameworks to address developments in crypto asset markets and activities,” the bank said in its latest Financial Stability Report.

It follows an earlier proposal to regulate stablecoins with the potential to cause systemic risks at the end of May, weeks after the terraUSD algorithmic stablecoin collapsed.

Read more: UK Government Wants Bank of England to Regulate at-Risk Stablecoins