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

It’s been six years since Europe’s Markets in Crypto Assets (MiCA) was first mooted and three years since it was enacted. A lot has changed in the meantime, not the least the growing interest from businesses and individuals in stablecoins for international payments.

That's dragged the tokens, cryptocurrencies whose value is pegged to a fiat currency, to the forefront as MiCA undergoes review in preparation for what's being called “MiCA 2.0,” an update to the once-pioneering regime that was designed mainly for spot crypto.

The European Central Bank has repeatedly said the strength of dollar-pegged stablecoins could damage its control over monetary conditions in the 21-nation eurozone, though its preferred solution is a central bank digital currency (CBDC), not euro stablecoins. Still, some policymakers have moderated their opposition, according to John Orchard, chairman of the Digital Monetary Institute at OMFIF, an independent research group for central banking, economic policy and public investment.

“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.