EU Crypto Regulation Heralds New Digital Currency Era – PayPal Holdings (NASDAQ:PYPL), Coinbase Glb (NASDAQ:COIN)

The EU crypto regulation, Markets in Crypto Assets (MiCA), ushers in a new era for an industry that will provide access to approximately 18% of global crypto transaction volumes.

In an effort to create a framework across all European Union (EU) member states, MiCA has mandated that all stablecoin issuers hold an Electronic Money Institution (EMI) license as of June 30. It imposed strict compliance requirements on exchanges.

Some exchanges have adjusted their offerings to include only stablecoins that comply with EU crypto regulations. They want to maintain access to a potential market of more than 200 million when MiCA is fully implemented by the end of the year.

MiCA is part of the EU’s digital finance package designed to mitigate crypto risks. It applies to cryptoassets not covered by existing financial legislation, specifically stablecoins and cryptoasset service providers.

This “is a huge milestone,” Circle CEO Jeremy Allaire said. It brings “digital currency into mainstream scale and acceptance,” he said.

Crypto Market Cap YTD, source: TradingView

EU Crypto Regulation Asks for Crypto Exchanges, Reaction from Stablecoin Issuers

In response to MiCA, California-based exchange Coinbase COIN will denominate unauthorized stablecoins that do not comply with MiCA.

“We intend to limit the provision of services with stablecoins that do not meet the MiCA requirements,” Brian Armstrong, Coinbase CEO, told CoinDesk on October 11.

Binance, the largest global cryptocurrency exchange, announced in early June that it would not delist any unauthorized stablecoins on the site. But it will limit their availability to European users “only on certain products,” it said.

PayPal PYPL issued its own regulated stablecoin, PayPal USD (PYUSD), through Paxos on August 7, 2023. PayPal operates under an EU banking license in Luxembourg, which gives it business access to the region under EU law.

Circle, the issuer of USDC and EURC, has obtained an EMI license. It did so under France’s banking regulator, the Autorité de Contrôle Prudentiel et de Résolution. USDC has outperformed USDT by more than 10% year-to-date.

USDC vs USDT Crypto Market Cap YTD, source: TradingView

EU Crypto Regulation heavy on consumer protection

MiCA requires digital asset operators to obtain a license in an EEA member state to operate across the EU. Issuers of stablecoins with a fixed reference to a fiat currency, called E-money Tokens, must keep at least 30% of their funds as bank deposits.

For stablecoins to be considered “significant”, at least 60% of fiat reserves must be spread across multiple institutions. It is based on criteria such as market capitalization, user base and transaction volume.

The EU cryptoregulation requires stablecoin issuers to disclose detailed information about their reserve assets and maintain liquidity. They must maintain capital standards and ensure consumer protection.

For example, stablecoins must be backed by a liquid reserve with a 1/1 ratio and partly by deposits.

EU crypto regulation requires risk disclosure

In addition, MiCA mandates the publication of white papers detailing possible risks and impacts for crypto-assets. It also requires detailed disclosure of reserve assets.

MiCA imposes usage restrictions on foreign currency EMTs, such as USDC and USDT, limiting them to 1 million daily transactions or €200 million in daily transaction value within the EU.

These measures can lead to wider adoption and integration into traditional financial systems.

But EU crypto regulation introduces complexities that can stifle smaller market players due to increased operating costs and compliance burdens.

Tether, which has long been criticized for a lack of transparency and reserve management, criticized MiCA. They “can not only make the work of a stablecoin issuer extremely complex, but also make EU-licensed stablecoins extremely vulnerable and riskier to operate,” CEO Paolo Ardoino told crypto research portal The Block said.

Tether has not yet obtained the EMI license. However, it is “developing a technology-based solution” “to serve the needs of the European market.”

US crypto industry fragmented compared to EU regulation

The regulatory approach to cryptocurrencies remains fragmented across the Atlantic, with different states and federal agencies imposing different rules. The US has yet to implement a comprehensive framework.

Discussions about stablecoin regulation and central bank digital currencies (CBDCs) are ongoing. This disparate regulatory environment creates uncertainties for crypto businesses operating across jurisdictions, including Coinbase, Kraken and Bitstamp.

The regulatory approach in the US in 2023 led to an increase in euro-dominated trading volumes at a faster pace than the dollar.

Source: Kaiko Research, The State of the European Crypto Market, 2023

In particular, the euro leads the dollar in cryptocurrency trading, as only 1% of transactions are completed using stablecoins compared to 90% in the US.

Access to the European market

The opportunity for major crypto players is immense. The market size of European cryptocurrency exchanges is expected to grow to $14.3 billion this year. It will reach 218.6 million users by next year,

Coinbase’s international business, which includes Europe, contributed approximately 17% of its total revenue in Q1 2024. By aligning with MiCA, Coinbase can leverage its regulatory approach within Europe and potentially increase its regional revenue share through derivatives in Europe .

Coinbase’s strong foundation with USDC, Circle’s MiCA-compliant stablecoin, positions the company to benefit from the regulatory environment in Europe. The world’s biggest tech companies have been waiting for regulatory clarity to integrate crypto. With MiCA, “they’re all hoping it happens in the U.S. as well,” Armstrong said. “We are positive about this.”

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