Stablecoins bridge the gap between the advantages of distributed ledger technology (e.g., Blockchain) and the traditional financial system. Their importance and acceptance are growing, particularly in international payments. Compared to traditional payment methods and other blockchain-based digital means of payment (e.g., Bitcoin), they promise not only greater value stability but also greater efficiency through faster payment processing and lower transaction costs. Their growing relevance has triggered regulatory pressure worldwide, true to the motto: What is (too) relevant must also be regulated.
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In this article, we take a brief look at what stablecoins are and how they are regulated in the EU.
What are stablecoins?
Stablecoins are cryptographic tokens (colloquially also known as “cryptocurrencies”) whose value is linked to an external reference value — usually fiat currencies such as the euro or US dollar, but also commodities such as gold. This link is intended to prevent or at least significantly reduce the sometimes considerable price fluctuations of traditional cryptocurrencies such as Bitcoin or Ether.
There are different types of stablecoins:
- fiat-backed stablecoins are linked to a fiat currency.
Examples: Tether (USDT), Circle (USDC)
- crypto-backed stablecoins are linked to other crypto assets.
Example: DAI
- commodity-backed stablecoins are linked to a commodity.
Example: Tether Gold (XAUT)
- algorithmic-backed stablecoins are not backed by any real assets, but are “stabilized” by algorithms.
Example: (orig.) Terra (UST)
Unlike traditional payment transactions, transactions with stablecoins are usually processed within seconds. Transaction fees are reduced because settlement takes place via low-cost networks and no intermediaries (such as banks) are required. In addition, their programmability allows for automated settlement via smart contracts. Compared to other blockchain-based digital means of payment (e.g., Bitcoin), stablecoins are subject to little or no price fluctuations.
Regulatory framework in the EU – MiCAR
In response to the planned “Facebook cryptocurrency” Diem, EU legislators have created the world’s first legal framework for crypto assets with the Markets in Crypto-Assets Regulation (MiCAR).
MiCAR has been in force in all its parts since December 30, 2024, with Titles III and IV (EU regulations on stablecoins) already in force since June 30, 2024.
Stablecoins in MiCAR
MiCAR does not use the term “stablecoin.” Instead, MiCAR refers to crypto assets and distinguishes between
- electronic money tokens (“EMT”)[1],
- asset-referenced tokens (“ART”)[2] and
- other tokens that are neither EMTs nor ARTs.
Under MiCAR, stablecoins are classified as either electronic money tokens (EMT) or asset-referenced tokens (ART).
MiCAR also differentiates between significant ART and significant EMT. The competent supervisory authority decides whether such significance exists on the basis of various criteria, e.g., the number of token holders (more than 10 million persons) or the total value in circulation (more than 5 billion euros). If ART or EMT are classified as significant, issuers are subject to additional obligations (e.g., conducting liquidity stress tests).
Similarities and differences between EMTs and ARTs (“MiCAR stablecoins”)
Both EMTs and ARTs are prohibited from granting interest or similar benefits by the issuer. A crypto asset white paper must be published for both crypto assets.
Both crypto assets must also be redeemable. EMTs are redeemable at any time at the nominal value of the amount of money received (i.e., cash, credit transfer or e-money). ARTs also entitle the holder to redemption either (i) by payment of a cash amount (but not e-money) corresponding to the market value of the assets to which the ART refers, or (ii) by delivery of the assets to which the ART refers.
ARTs differ from EMTs in that ARTs are not primarily intended for payment/exchange purposes, whereas EMTs are designed precisely for this purpose. Accordingly, MiCAR (Art. 23) provides for a restriction on the issuance of ARTs that are commonly used as a means of exchange. This is the case if certain thresholds are exceeded (“estimated quarterly average number and average aggregate value of transactions per day associated to its uses as a means of exchange within a single currency area of one million transactions or EUR 200,000,000,” Art. 23 MiCAR).
Different requirements for “customer funds protection” are also imposed on EMTs and ARTs. EMTs are considered electronic money, so the requirements for “customer funds protection” are similar to those imposed on electronic money under the 2nd Electronic Money Directive. For example, Art. 54 MiCAR stipulates that at least 30% of the funds received in exchange for EMTs must be deposited in “separate accounts” and the remaining amounts must be invested in secure, low-risk assets (i.e., highly liquid financial instruments with minimal market, credit, and concentration risk denominated in the same official currency as the EMT).
Issuers of ARTs are required to hold a reserve of assets (Art. 36 MiCAR). MiCAR attaches certain rules to the custody (Art. 37 MiCAR) and investment (Art. 38 MiCAR) of the reserve of assets. Custody must be carried out by certain custodians (e.g., banks, crypto-asset service providers, or securities, depending on the type of reserve asset (e.g., crypto or financial instrument). Investments may only be made in highly liquid financial instruments with minimal market, credit, and concentration risk. The investments must also be quickly liquidatable with minimal negative price effects.
Another difference between EMTs and ARTs lies in the authority to issue them. While ARTs may be issued by credit institutions or companies with the appropriate MiCAR authorisation (Art. 16, 21 MiCAR), the issuance of EMTs is reserved exclusively for credit institutions or e-money institutions.
Challenges and perspectives
Stablecoins offer clear advantages over traditional means of payment. MiCAR has created a comprehensive regulatory framework that provides legal certainty for the use of stablecoins in the EU.
Nevertheless, there is currently (still) legal uncertainty regarding the provision of transfer services for customers via crypto assets (Art. 3 No. 26 MiCAR) with EMTs, as transfers with EMTs can (also) be classified as payment services subject to authorisation. As a result, such transfer services with EMTs may only be provided by authorised payment institutions, meaning that there is potential for double regulation by MiCAR and PSD2 (soon to be PSD3/PSR) for the provision of certain transfer services.
It remains to be seen how this problem will be resolved legally (in the long term). The EU agengcy EBA has already proposed options, which we described in detail in the article “Double Regulation for Crypto Asset Services regarding E-Money Tokens?”. In addition, the Council of the European Union has made proposals on the regulatory treatment of transfer services with EMTs in its position papers on the future PSD3/PSR. We will report on this separately.
[1] E-money tokens (EMTs) are tokens that are linked to an official currency.
[2] Asset-referenced tokens (ARTs) do not refer exclusively to an official currency, but may be backed by multiple or other assets.
