On September 14, 2020, after the conclusion of the Digital Finance Outreach Closing conference, a collective statement regarding Stablecoins was issued by the finance ministers from Germany, France, Italy, Spain, and the Netherlands.
The EU is set to become the first major jurisdiction to implement cryptocurrency regulations, with the 167-page draft document expected to be presented in the forthcoming weeks.
In reaction to the statement, European Commission EVP Valdis Dombrovskis acknowledged the concerns raised by the ministers.
The draft proposal indicates lighter regulations for cryptocurrencies deemed to pose lower risks, while imposing stricter rules on “significant e-money tokens” (referred to as ‘Stablecoins’), focusing on obligations.
The aim of the new regulations is to ensure legal clarity, foster innovation, protect consumers and investors, maintain financial stability, and uphold market integrity, as stated in the document. The urgency to regulate at the EU level has intensified, especially since some member states such as Germany, France, and Malta have begun to create their own regulations.
An overview of “The Proposal for A Regulation of the European Parliament and of the Council on Markets in Crypto-Assets (MiCA)’” reveals that crucial changes related to crypto-assets are impending. The proposal outlines several key objectives, including:
- Establishing legal certainty
- Implementing strict regulations for Libra & similar entities
- Creating legal frameworks to ensure compliance from third-country providers
- Comprehensive regulations on money laundering and customer identification
- Encouraging support while fostering innovation and growth
- Motivating more consumers and investors to engage in this market
- Ensuring financial stability
- Centralized European oversight
- Possibility of a virtual euro by the ECB
The statement emphasizes the importance of a regulatory framework to enhance “Europe’s influence and reinforce its economic independence in payment systems.” It is critical for any Stablecoin regulatory framework to focus on maintaining monetary sovereignty and safeguarding EU consumers. All proposed measures must comply with GDPR privacy legislation as well as anti-money laundering/counter-terrorism financing (AML/CTF) directives.
The joint statement highlights five fundamental principles,
1. The currency must always be redeemable for the asset-backed legal tender. (some Stablecoins don’t offer this)
2. Each Stablecoin must be backed at a 1:1 ratio with fiat currency.
3. Assets eligible for the reserve must be restricted to deposits in EU-approved financial institutions or a proportion held in highly liquid assets under proper safeguards.
4. These assets must be denominated in Euros or the currency of an EU member state.
5. The organization managing the Stablecoin must be based in the EU.
This last stipulation comes at a pivotal moment as the EU contemplates whether to issue a central bank digital currency (CBDC). The statement underscores that “no global asset-backed crypto-asset arrangement should commence operations in the European Union until all legal, regulatory, and oversight challenges and risks have been adequately assessed and addressed.” By requiring Stablecoin firms to register within the EU before embarking on any activities, the EU ensures regulatory oversight, allowing them control over authorization timelines. Thus, Stablecoin firms could be influenced by the EU’s decision on CBDCs release.
The additional requirements state that each Stablecoin must maintain a 1:1 backing with fiat currency. Eligible reserve assets must be limited to deposits in EU-approved banks or a portion in highly liquid assets with sufficient safeguards. Furthermore, these assets must be denominated in Euros or a currency of an EU member state. The reserves must remain segregated and non-convertible to circumvent exchange risks.
The Libra Association, alongside issuers of ‘significant e-money tokens’, will face heightened challenges as they will be required to operate as a credit institution or an electronic money institution, adhering to stricter regulations than other digital service providers.
Consequently, Libra and other ‘significant e-money tokens’ will fall under the supervision of the European Banking Authority. Additionally, the Commission will supplement this with another body, including national and European regulators, to assist the EBA in monitoring these systemic digital assets.
The EBA will lead this supervisory college, including representatives from the national authority of the member state where the issuer of the significant e-money tokens has received authorization, the European Securities and Markets Authority (ESMA), the ECB, or any other central bank in the EU, depending on the backing currency of the digital token.
The draft text also mandates the Libra Association and other issuers of significant e-money tokens to redeem the monetary value of these tokens at par value, upon request from holders, in either cash or via credit transfers. Moreover, they are prohibited from offering interest to holders of these digital assets.
The EU’s Digital Finance Strategy is anticipated to be unveiled later this month.