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

At the 11th hour, on Thursday June 30, the last day of the French presidency of the Council of the EU, members of the European Commission, the EU Parliament and the Member States reached an agreement on landmark legislation to regulate crypto assets and service providers: the Markets in Crypto Assets (MiCA) regulation.

Stefan Berger, the lawmaker in charge of leading MiCA through the EU legislative process, tweeted confirmation that policymakers had reached an agreement. This was also confirmed by European Commissioner Mairead McGuiness as she left the talks.

“I think everybody’s now aware that you can’t have an unregulated sector,” McGuinness told CoinDesk, referring to turbulence seen in recent weeks in crypto markets.

“We’re glad that we’re leading on this,” she said, adding that “we do think there needs to be international cooperation because it’s important that we don’t regulate on our own.”

The European Commission proposed this legislation in 2020 as a response, at least partially, to the growth of stablecoins and the potential risk to financial stability, in particular after Facebook announced its Libra, then renamed Diem. As this new product was unregulated, regulators feared that they could circumvent Anti-Money Laundering (AML) rules, so EU lawmakers designed a new law that would complement what existed. It’s one of the reasons the document heavily regulates stablecoins, referred to as “asset-referenced tokens” or “e-money tokens,” while leaving out other crypto assets, which are subject to lighter requirements.

For crypto exchanges, crypto issuers and other companies trading crypto assets, the requirements include registering as legal entities in Europe and, in many cases, submitting a white paper before they can provide services in Europe. For small- to medium-businesses, there are exemptions to producing and submitting the white paper.

For stablecoin issuers, there are stricter requirements than for crypto-asset issuers, including having more funds, limitations to provide interest with stablecoins, and in some cases observing additional rules on reserves. Enrnest Ustasun, an EU lawmaker involved in the negotiation, confirmed on Twitter that large stablecoins will have “a cap of 200 million euros in transactions per day.”  Another difference is that if a stablecoin is of significant relevance, supervision will be done by the European Banking Authority, not only by European Securities Market Authority (ESMA).

ESMA was also confirmed as the “new crypto-sheriff” in town, Mr. Ustasun said, with “powers to prohibit or restrict the provision of crypto-assets services by crypto assets service providers (CASPs) or distribution or sale of crypto assets, in case of a threat to investor protection, market integrity or financial stability.”

In order to reach an agreement, some aspects have been left out of this legislation, but some policymakers like European Central Bank’s Christine Lagarde have already suggested that further laws would be needed to cover new areas like crypto lending.

“No legislation is ever set in stone, and no legislation in the area of crypto could be,” McGuinness said.

Non-fungible tokens (NFTs) and most of the products in decentralized finance (i.e. DeFi) fall outside the scope of the regulation, which would probably be seen as a relief in the crypto community. However, discussions were held about legal entities that create a platform to trade these products (like OpenSea), whether these entities would be responsible for adhering to MiCA, and would need to register the product or service.

Another point where there was no consensus, and therefore, it wasn’t included in the final agreement is about limiting the environmental impact of the proof-of-work consensus mechanism that underpins bitcoin.

This agreement paves the way for a formal approval by the EU Parliament and the EU Council. However, formal approval in Parliament is unlikely to be granted next week during the last plenary session before the summer recess.

Read more: EU Crypto Regulation May Need Clarification From Day One