Analyzing MiCA’s Significance Regime for Stablecoins

The emergence of global stablecoins has prompted both national and international regulatory bodies to tackle concerns regarding their potential effects on financial stability and monetary sovereignty. Thus far, this concept has been largely theoretical in nature, with the exception of the collapse of Terra Luna’s so-called algorithmic ‘stablecoin’ – UST, that wiped out $40 billion in value virtually overnight (at its peak Lehman Brothers had a market value of $46 billion), but without affecting broader financial markets at any level.


The dramatic collapse of UST has sparked debates about the point at which stablecoins achieve global significance or systemic importance, thereby necessitating adjustments in regulation and oversight. In the absence of extensive practical experience and historical data, regulators have been confronted with the challenging responsibility of formulating functional and suitable rules for implementation.


The EU, rather characteristically, has been the first major jurisdiction to adopt a supervisory and regulatory regime for “significant stablecoins” in the Markets in Crypto-Asset Regulation (“MiCA”) that was passed in June 2023. Under MiCA, fiat-backed stablecoins or e-money tokens that have surpassed a specified adoption threshold, measured by a set of seven quantitative and qualitative indicators, will face additional and significantly increased regulatory requirements. At this point, they will also fall under the supervision of the European Banking Authority (EBA) as opposed to one of the EU’s national authorities. 


Does this new regime appropriately capture and address the impact of global stablecoins?


Given the scarcity of historical precedents, it is logical to examine the existing frameworks in banking and payments that define the notion of “systemic importance” as a means to address this question effectively. This is precisely what Helmut Bauer, the former Head of Banking Supervision at German regulator BaFin, and I sought to achieve in our newly published report on MiCA’s significance regime – accessible through SSRN here.


Comparing MiCA’s regime for significant stablecoins with the Basel Committee on Banking Supervision (BCBS) framework for global systemically important banks (G-SIBs), the European Central Bank (ECB) oversight framework for electronic Payment Instruments, Schemes and Arrangements (PISA), and the EU Single Supervisory Mechanism (SSM) Framework for significant credit institutions in the EU, results in two main takeaways:


Firstly, what sets MiCA’s regime apart is its dual-purpose approach: it not only transfers supervisory responsibility but also applies additional prudential measures. This is a unique feature not found in any other framework we’ve analyzed.


Second, while the transfer of supervisory responsibility to the EBA seems broadly aligned with the SSM framework and PISA who trigger EU supervision, MiCA’s significance criteria seem misaligned with the BCBS G-SIB model that is similarly aimed at capturing systemic risks and introducing increased prudential requirements. As one example, MiCA’s market capitalisation threshold sits at €5 billion, while the smallest G-SIB in terms of its size score assigned to G-SIB bucket 1 is Standard Chartered with a total value of assets of (GBP) £682 billion (end-2022).


This brings us to a nuanced conclusion. While the regime and the calibration of its significance thresholds may warrant the transfer of supervisory responsibility to the EBA, it does not appropriately represent systemic risk at the financial stability level that would warrant the substantial increase of prudential requirements similar to that of G-SIBs. Therefore, we propose that the dual purpose of MiCA’s significance regime should be disentangled. 


To dig deeper into the comparison between MiCA’s significance regime and the BCBS G-SIB, the ECB PISA, and the EU SSM frameworks, as well the EU’s singular approach on the topic compared to the rest of the world, I encourage you to read the longer report here.

Circle’s response to the EBA consultation on revised guidelines on money laundering and terrorist financing risk factors

On August 31, Circle submitted its comments to the amendments made by the European Banking Authority (EBA) to extend the scope of its money laundering and terrorist financing (ML/TF) guidelines to Crypto-Asset Service Providers (CASPs). The EBA amendments will set common regulatory expectations of the steps CASPs should take in order to identify and mitigate these risks effectively.

Circle welcomes the publication of clear guidelines that will allow CASPs to carry out their ML/TF risk assessments effectively. However, in its response, Circle highlights the need for these guidelines to be technology neutral and follow principles established by previously adopted EU legislation such as the Markets in Crypto-Assets Regulation (MiCA) and the Transfer of Funds Regulation (TFR).


Circle’s key points


EBA guidelines should follow established MiCA-terms


  • The term “Providers of services in the crypto-assets ecosystem” lacks the necessary precision to exclusively comprise businesses subject to regulation under MiCA in the EU. The broad terminology used could unintentionally include providers of technology and ancillary services, such as blockchain analytics, web infrastructure, etc. Such entities are not involved in, and have no control over the flow of crypto-assets, thus presenting a limited risk of money laundering and terrorist financing. We recommend using the MiCA-defined term “crypto-asset service provider.”

The use of self-hosted wallets is not a general indicator of high-risk


  • Self-hosted wallets play an important role in the blockchain ecosystem and offer a myriad of benefits, particularly with regards to financial inclusion and payment system optionality. According to the FATF, there is a significant degree of variability in the data related to illicit transactions. This has resulted in a lack of consensus on the size of the P2P sector and its associated ML/TF risk. Moreover, the implementation of the TFR will already address illicit finance risks when transacting with self-hosted wallets through a well-established risk-based approach. This may include the utilization of blockchain analytics tools as well as counterparty data verification. Therefore, CASPs that facilitate  transfers to and from self-hosted wallets should not be designated higher-risk entities under the guidelines. 

The guidelines should not extend to providers that are exempt from MiCA’s regulatory scope


  • If certain EU firms fall outside of MiCA’s regulatory perimeter, these should not be designated as higher risk. The fact that they are left out of EU regulations indicate that they do not warrant financial, prudential and AML regulation in the EU and should therefore not be subject to these EBA guidelines.

Circle’s response to the ACPR consultation on “Decentralised Finance”

The ACPR, the French Prudential Supervision and Resolution Authority that exercises prudential supervision of regulated French financial firms such as banks and insurance companies, launched a discussion paper on potential regulatory approaches for Decentralised Finance or short DeFi. The paper and public consultation will contribute to ongoing discussions, particularly at the EU level after the passage of the landmark Markets-in Crypto-Assets Regulation (MiCA), on the value and procedures for regulating DeFi.

On May 19th, 2023 Circle submitted its response, highlighting DeFi’s promises for the future of financial services, the importance of public blockchains, and the benefits or drawbacks of various regulatory avenues.

Circle’s key points 

Circle underscores the benefits of DeFi for cheaper, faster and programmable financial services

  • In a research paper jointly published by Uniswap Labs and Circle, we demonstrate how combining on-chain foreign exchange markets and payment stablecoins like USDC and EUROC can reduce remittance costs by up to 80%, while reducing settlement risks and time. Decentralised, automated lending represents, amongst many others, another promising use case that can expand and improve lending conditions for borrowers traditionally left out of credit markets.

Circle encourages the ACPR to distinguish between “DeFi protocols” and “DeFi applications”

  • Circle suggests using the term “DeFi protocol” instead of “DeFi application” to describe the set of software and smart contract protocols that are built on blockchain infrastructure. As users don’t have a way to interact with these protocols without the use of further tools, interfaces, or wallets, the term “DeFi application” does not accurately represent the nature of the protocol, particularly when compared to what the ACPR describes as “centralised applications”, such as centralised exchanges, data analysis platforms, or oracles, that can be used and interacted with directly by end users.

Circle highlights the benefits and importance of public, permissionless blockchains  

  • It is critical that blockchains intended for public use remain open and public. Permissioned systems that selectively approve only certain parties and for certain innovations will always constrict innovation. As they lack composability and interoperability, they cannot create the same network effects of utility for businesses and end users. As such, private blockchains cannot compete with public blockchains and do not represent viable alternatives for the global, frictionless exchange of value that promises to enhance economic equality and financial inclusion around the world.

Circle supports the ACPR’s pragmatic approach to seek the same regulatory outcomes, while acknowledging the unique technological differences between DeFi and traditional financial markets

  • Voluntary compliance principles and pathways for DeFi protocols, including for example security audits, could be a promising way to embed greater transparency and security standards into DeFi. These approaches that resemble product security regulation should however always remain voluntary in nature, and be developed in close public-private collaboration. Circle encourages the ACPR to further investigate concepts of “embedded supervision” where public authorities or observatories monitor DeFi activity and pro-actively warn and inform consumers in real-time by taking advantage of the public, transparent nature of blockchains.  

Circle underlines that regulatory regimes should focus on DeFi intermediaries and applications, not protocols

  • Centralised intermediaries facilitating access to DeFi represent the more suitable actors to be brought under the regulatory scope compared to the activity of developing software. However, we urge the ACPR to recognise the difference between mere user interfaces and crypto-asset service providers (CASPs) that have an active business relationship with their users and take custody of their assets. Regulatory requirements should be distinguished accordingly. Circle does not support extending MiCA’s scope to web interfaces and points to MiCA Recital 83 in that context: “Depending on the services {provided} and due to the specific risks raised by each type of services, crypto-asset service providers should be subject to requirements specific to those services. {…} Hardware or software providers of non-custodial wallets should not fall within the scope of this Regulation.”

We appreciate the ACPR’s effort to develop suitable regulatory pathways for this complex and novel technology and commend the ACPR’s willingness to engage openly with the industry and the public on the topic. We look forward to further opportunities for constructive engagement.

MiCA’s impact on the EU crypto industry and beyond


MiCA’s impact on the EU crypto industry – harmonization, competitiveness,  institutionalization, and market share gains for regulated businesses.

For the European Union (EU) crypto industry, the Markets in Crypto-Assets Regulation (MiCA) represents a true game changer. Until now, crypto companies in the EU had to knock at every single national regulator’s door if they wanted to serve the entire EU market.


Some countries like France, Germany, or Austria have dedicated crypto licensing regimes in place, while others like Ireland have created AML registration obligations. Outside of those mentioned, many countries didn’t have any regulatory frameworks in place for crypto businesses. Navigating the complex national regulatory patchwork of 27 different rulebooks became a very costly and burdensome endeavor. Undoubtedly, this has constrained the growth of EU startups, and limited their competitiveness vis-a-vis their US or Asian counterparts. Under MiCA, the same binding EU requirements will apply to all 27 member countries. Once a company has been granted a MiCA license in one country, it will be able to “passport” it and offer the licensed service throughout the entire single EU crypto market.


With MiCA in force, offshore, unregulated companies will no longer be able to target EU consumers pro-actively. Not least due to the recent FTX meltdown, the reverse solicitation rules, i.e. the rules under which foreign businesses can onboard EU customers that act on their own initiative, can be expected to be stricter than for other financial service providers in traditional markets. This may lead to MiCA-regulated crypto businesses gaining significant EU market share from their offshore, unregulated competitors.


Plus, MiCA will, in all likelihood, lead to more institutional adoption and activity in the EU crypto market. According to Bloomberg, only 4% of institutional funds in Europe have exposure to crypto-assets. Regulatory uncertainty is one of, if not the main concern holding institutions back from entering the space. I expect major European banks will roll out crypto-asset services in the next 48 months, be it custody, exchange, or the issuance of e-money tokens or asset-referenced tokens, colloquially referred to as stablecoins.


To sum up, expect MiCA to increase the competitiveness and market share of regulated businesses and the institutional share of overall activities and services provided.


The creation of regulatory clarity amidst global uncertainties could very well attract capital, talent, and companies, especially those looking to issue tokens from the rest of the world. Crypto, as an industry, could become a huge opportunity for an economic and technological revival of the EU.


However, much of MiCA’s practical success boils down to the implementation standards and enforcement practices to be developed by the EU supervisory authorities in the next 12-18 months. 


Some MiCA passages carry the risk of burdening industry participants, and their full effects will only become apparent once technical implementation standards provide practical operational guidelines.


The worst case scenario is one where only a minority of EU crypto startups manage to shoulder the substantive legal and compliance costs of an ongoing bear market, stablecoin issuers make a detour around the EU, and exchanges face burdensome disclosure requirements and liabilities that don’t benefit consumers and make their offerings uncompetitive compared to offshore counterparts. EU consumers would either be cut off from innovation or continue to use (and be exposed to) the largest offshore pools of liquidity and utility.


Additionally, supervisors could consider that most NFT and DeFi projects actually fall within the scope of MiCA and need to comply – a door that is still left open to interpretation by current MiCA recitals. This would inevitably lead to teams and resources migrating out of the EU.


MiCA could represent a positive boost for EU crypto businesses and the EU economy overall, but its success is highly dependent on the upcoming development of practical implementation standards.


MiCA’s global impact – will MiCA set global standards?

MiCA’s potential to become for crypto what GDPR is today for privacy, an almost globally adopted regulatory standard, is certainly there, but far from a foregone conclusion.


Undeniably, MiCA will play a huge role in how other jurisdictions, especially those without much experience in financial regulation and supervision, think about their own crypto-asset framework. A closer look into the recent Financial Stability Board(FSB) recommendations for crypto service providers and so-called “global stablecoin arrangements” is all it takes to realize how many of the MiCA concepts have found their way into global standard setting bodies.


The EU market is the single largest internal market in the world with 450 million relatively wealthy consumers. By the sheer size of its market, MiCA will likely persuade many companies around the world to adopt MiCA operating standards, possibly on an international scale in order to maintain globally streamlined operations and products. The global impact of EU regulatory standards has been observed in a number of industries, from the chemical industry to agriculture or tech, and coined as the “Brussels effect” by Columbia Law School Professor Anu Bradford.


It is not by coincidence that the current U.S. CFTC Commissioner Caroline Pham warned that “as the U.S. struggles to provide regulatory clarity to the domestic crypto industry, global regulatory frameworks like MiCA could fill the gap.”


The longer the US regulatory vacuum for crypto-assets persists, the greater I expect the global impact of MiCA standards to be.


However, it is only MiCA’s practical success that will matter at the end of the day, and much of the practical implementation work still lies ahead of us. If MiCA proves to be workable for the industry, consumers and regulators alike, it will have a global impact. If not, many jurisdictions will decide to choose an entirely different policy path.


Since industry participants can have a lot of impact on making MiCA a success by responding to the upcoming consultations on implementation standards, I encourage all crypto projects and companies to engage closely with EU supervisors – primarily the European Banking Authority and the European Securities and Markets Authority – in the next 12-18 months. 


So far, MiCA is without any doubt the most comprehensive regulatory framework for crypto-assets we have seen on a global scale. The industry has been calling for regulatory clarity for years, and should not miss the opportunity to contribute to making it a success.

Topics like MiCA and EU Policy are key discussion points for Circle during Paris Blockchain Week. We plan to converse with ecosystem and policy leaders to share insights on the future of digital asset regulation in Europe, as well as how we anticipate blockchain will grow in real-world utility. Take a look at what we have scheduled during PBW2023 with the EU Crypto industry.