Three years after MiCA became law, Europe’s crypto framework is undergoing a rethink

“If you listen to European Central Bank officials, you’ll notice their opinions change depending on the individual,” Orchard said in an interview. “But they are now willing to tolerate stablecoins on bank balance sheets and perhaps as a remittance tool, but they don’t want stablecoins for wholesale settlement, which the U.S. is prepared to experiment with.”

The U.S. last year passed the GENIUS Act, which creates a definition for payment through stablecoins and assigns the Federal Reserve and the Office of the Comptroller of the Currency — two of the major U.S. bank regulators — tasks overseeing their issuance. Dollar-denominated tokens account for $310 billion of the $311 billion market. Non-dollar stablecoins don’t even reach 0.5%, according to data from DeFiLlama.

There are also thorny questions around yield distribution and the risk of deposit flight — the transfer of funds from bank accounts to blockchain wallets — an area within the Clarity Act of the U.S., which has come to a messy compromise and has yet to become law.

“The banking lobby in the U.S. and Europe has fought convincingly to prevent stablecoins from paying yield because of the risk of deposit flight. The EU Commission wants to take another look at that, although it’s unlikely to change,” Orchard said.

One major difference between stablecoins in the U.S. and those in Europe is the MiCA requirement to send stablecoin deposits back into the banking system while under GENIUS reserves can be held in U.S. government debt.

In that regard, it’s worth considering Qivalis, a group of banks and other financial institutions looking to develop a euro-denominated stablecoin. Qivalis addresses EU concerns because its members are banks and so can cater to the reserve requirements internally. It also presents the possibility of a push back against U.S. dollar dominance, an element of the EU’s strategic autonomy agenda.

A key drawback for the EU is the lack of a unified treasury bond market such as exists in the U.S. There was a notion that a European safe asset could be created synthetically, a potential stablecoin design where the stablecoin buys money market instruments from European governments, similar to how a GENIUS stablecoin buys T-bills, OMFIF’s Orchard said.

“The Commission is said to be toying with the idea of reviewing the reserve requirements so that a GENIUS-Act-like model could exist, where the stablecoin operator might buy money market instruments from European governments instead of routing the money back into the banking system,” Orchard said.

European authorities are also debating how to treat multi-issuance stablecoins, such as Circle Internet’s (CRCL) USDC, which can be minted by multiple distinct legal entities across different jurisdictions, yet presented to users as a single, fungible token.

When MiCA was designed, it was definitely the European Commission’s intention to support multi-issuance models, according to Catarina Veloso, director, regulatory and compliance at Notabene, a protocol designed to bring crypto transactions into the everyday economy. But during the implementation stage, different stakeholders within the EU, including the ECB, pushed back because they have their own views on the resulting risks.

The real value of stablecoins is that they are natively global, said Veloso. To impose geographic limits would create a scenario where Circle Europe, now licensed under MiCA, would need to build its own fragmented version of USDC for European markets, she said.

“One of stablecoin’s main value-adds is that it’s not a payment system built within a specific jurisdiction,” Veloso said in an interview. “So that value is diluted by the fact it’s now being captured by regulatory frameworks that do exist within borders.”

Unrelated to stablecoins, another key area of discussion is the possibility of more centralized control of MiCA, under the auspices of the European Securities and Markets Authority (ESMA).

That would help rule out discrepancies in national implementations of the rules, while raising the risk of creating a bureaucratic organization that could stifle the nascent industry. Some observers, including within the European Commission, have suggested that this centralization away from national regulatory authorities is too early.

“At the moment, the supervision of MiCA is distributed through the National Competent Authorities — Bafin, and so on — and if that is to be changed, the regulation requires updating,” Orchard said. “Given the necessity to, they decided to take the opportunity to consider other areas that could be improved, including the distribution of competence between MiCA and MiFID [Europe’s Markets in Financial Instruments Directive], for example.”

Bringing this back to the needs of businesses in Europe, Denzel Walters, head of Luxembourg at crypto trading firm B2C2, pointed to the expertise that that jurisdiction’s relatively small domestic market has when it comes to understanding and allowing distribution of services, not just across Europe, but globally.

“From a business perspective, there are a number of reasons why we chose to set up our European presence from Luxembourg, and whether it’s the national or the European regulator, you would like to see those advantages continue to persist,” Walters said in an interview.

“Surely the outcome is not the regulation itself,” he said. “The outcome has to be a business’s ability to grow.”