CryptoReflexions#11 - stablecoins & MiCA

Growing adoption of crypto-assets and a changing regulatory framework

A recent study by ADAN, published in 2024, reveals that the proportion of crypto-asset holders ranges from 12% in France to 17% in the Netherlands. These figures, constantly evolving, reflect a growing adoption of crypto-assets, a trend that has been observed for several years. The reasons behind this adoption can be multiple, ranging from improved knowledge about crypto-assets to the search for asset diversification, as well as facilitated access thanks to increasingly intuitive digital platforms.

This adoption also reflects an evolution in attitudes toward alternative financial systems, but it has not escaped European legislative bodies, which have undertaken to regulate this sector. The Markets in Crypto-Assets (MiCA) regulation was adopted in 2024, four years after the initial proposal by the European Commission.

The stated objective was to protect consumers while ensuring the integrity of financial markets. The proliferation of digital assets raised concerns not only about the volatility of these assets but also about the potential risks of fraud and money laundering. On June 30, 2024, a first part of the regulation came into force, introducing strict rules relating to stablecoin issuances, crypto-assets designed to minimize the volatility that characterizes other digital assets.

Stablecoins have indeed experienced growing popularity due to their promise of stability, often pegged to an underlying value such as a fiat currency or a basket of currencies. This type of asset is particularly popular with users who seek to benefit from the technological advantages of crypto-assets while limiting their exposure to volatility. Stablecoin issuers are now subject to increased obligations of transparency, governance, and reserves, and the MiCA regulatory framework aims to establish consistency across the entire European crypto-asset market.

Stablecoins, a threat to monetary policy?

Stablecoins represented 8% of all crypto-assets in circulation in December 2023, according to ESMA.

The regulation distinguishes between two types of stablecoins. Electronic money tokens and asset-referenced tokens (ARTs).

Electronic money tokens are a type of crypto-asset that aims to maintain a stable value by referencing the value of an official currency. They can only be issued by a credit institution or an electronic money institution.

ARTs, on the other hand, are a type of crypto-asset that is not an electronic money token and that aims to maintain a stable value by referencing another value or right or a combination thereof, including one or more official currencies.

The MiCA regulation sets caps on ART issuance, with the stated objective of protecting the integrity of financial markets and preventing any potentially negative impact on the stability of the financial system. This regulation comes in a context where monetary authorities fear a loss of control over traditional monetary levers.

Recital 40 of the MiCA regulation states that:

Asset-referenced tokens could be widely adopted by holders for value transfer or as a medium of exchange, thus posing increased risks to the protection of holders, in particular retail holders, and to market integrity.

Further on, the regulation indicates that a competent authority could refuse to grant authorization if the issuer’s business model represented a serious threat to market integrity, financial stability, or the smooth functioning of payment systems.

These restrictions call for reflection.

The underlying argument seems to be, in reality, the protection of the monopoly over monetary policy.

Indeed, if ARTs became too popular, central banks believe they would lose some of their ability to control the money supply and to implement their monetary policies effectively.

However, do ARTs truly constitute a serious threat in this regard?

Monetary impact of ARTs: myth or reality?

In my view, the use of ARTs seems unlikely to disrupt the money supply because the use of ARTs does not require “ex nihilo” creation. To be used, ARTs must be exchanged for something and their reserve underlyings (official currency, a right, or a combination thereof) help prevent the “slippages” denounced by MiCA.

Rather than imagining the impact in theory, it does not seem uninteresting to examine the situation concretely.

Let us therefore review the ways to acquire ARTs.

An ART can be purchased from the issuer or exchanged on a platform. We can consider that this purchase can be made either by converting a crypto-asset or by “traditional” purchase in fiat currency (hereinafter fiat).

ARTs could also be used as a means of payment to pay for the purchase or sale of goods or services.

Purchase in fiat currency

In the case of a fiat purchase, the money supply is not increased – it remains stable and the user will use their ARTs instead of fiat.

When a user acquires ARTs with euros, no expansion of the fiat money supply occurs. The impact is therefore neutral.

Conversion of a crypto-asset

For the conversion of a crypto-asset, the result is generally the same. Either the user purchased this crypto-asset with fiat or they mined or validated a block of transactions to obtain a crypto-asset reward.

For this mining or block validation work, the user had to purchase, in fiat, a more or less substantial infrastructure (proof of work) or tokens to participate in validation (proof-of-stake).

Thus, regardless of the nature of the initial asset underlying the ART issuance, this issuance does not seem to induce an imbalance in the money supply.

ARTs merely shift part of existing value to another medium, without monetary expansion.

This dynamic is comparable to that of traditional bank deposits, where money deposited in a bank account is replaced by a claim against the bank, without modification of the total money supply.

Unavailability of fiat?

In response to these explanations, some could argue that the acquisition of ARTs could “lock up” a portion of the fiat money supply, thereby making fiat less available and potentially exerting upward pressure on its value.

If too large a share of the money supply is unavailable, any increase in demand for fiat would then have an impact on the price since supply is the same or lower.

However, the increase in demand is hypothetical and very unlikely. I identify 2 reasons:

Users of fiat who have acquired ARTs can easily recover fiat by exchanging ARTs with issuers (the latter have an obligation imposed by the MiCA regulation in this regard).

ART holders do not, in principle, need fiat because they use ARTs in place of the fiat exchanged to acquire these ARTs.

The lockup of fiat and its consequences therefore seem irrelevant from the perspective of users but could disturb the central bank, which would face a fragmentation of private actors potentially holding significant fiat reserves.

A regulation that hinders competition?

The restrictions imposed on issuance, notably the very low caps set in Article 23 of MiCA (namely 1 million transactions and EUR 200 million per quarter), seem mainly designed to limit the emergence of serious competition to a potential digital euro, the development of which is still underway.

Furthermore, these caps raise the question of the real place of stablecoins in the European monetary ecosystem. While the European Central Bank (ECB) is actively exploring the possibility of a digital euro, the limitation of ARTs could amount to a protectionist measure aimed at preparing the ground for a state digital currency, without leaving real prospects for private solutions to establish themselves durably. Such an approach risks limiting innovation and the diversity of financial solutions, which are nevertheless important in a context of rapid transformation of financial technologies.

Questions about the consequences of regulation

The imposition of these caps raises several legitimate questions:

Transaction surveillance: To verify compliance with the caps, issuers will need to precisely monitor transactions, which will lead to new potential intrusions into users’ privacy. Is this extensive surveillance proportionate to the risks invoked? Moreover, this surveillance obligation raises the question of the centralization of financial information and attacks on confidentiality, which is nevertheless one of the key advantages sought by crypto-asset users.

Monetary competition: The coexistence of competing currencies should not necessarily undermine market integrity. Friedrich Hayek, in 1976, had already theorized the benefits of monetary competition: allowing users to abandon an inefficient currency in favor of one that best preserves their purchasing power. In practice, competition between currencies could encourage central banks to improve their practices and propose more transparent and responsible monetary policies (but that may be precisely why they do not want it).

Hindered innovation: By limiting the volume of transactions and ART issuance, the regulatory framework could also slow innovation in a sector where flexibility and creativity are essential. Many companies developing financial solutions based on crypto-assets could be deterred by overly restrictive regulation, preferring to turn to other jurisdictions that are more open and conducive to experimentation.

A monopoly under the guise of consumer protection

The MiCA regulation, although presented as a consumer protection measure, seems above all designed to preserve the monopoly on monetary issuance. By setting low caps and reinforcing constraints, the regulation protects States and central banks against any form of potential competition, including that from currencies that are more stable and less subject to inflation. This strategy of maintaining the status quo could be justified by the desire to preserve financial system stability, but it risks going against the interests of consumers, who could benefit from a greater diversity of choices in terms of monetary instruments.

Yet, the primary purpose of monetary policy should be to preserve citizens’ purchasing power, not to maintain a monopoly at all costs. The intransigence of current regulation, as it is formulated, risks missing this fundamental objective. By seeking to avoid any disruption to the monetary monopoly, regulators are missing an opportunity to strengthen the resilience of the financial system through increased diversity of currencies and issuers.

Conclusion

The European regulatory framework for crypto-assets, as it is taking shape with MiCA, raises legitimate questions about the true intentions of the legislator: is its primary aim to protect consumers or to strengthen the predominance of state currency? By restricting ART issuance, the regulation seems to be leaning toward the latter option. Let us hope that in the future, more balanced regulation or relaxations will support the evolution of the monetary sector and foster healthy competition, for the ultimate benefit of European citizens.

More inclusive and flexible regulation could promote not only stability but also innovation and the competitiveness of the European Union in the field of financial technologies. The success of the regulatory framework will not only be measured by its ability to regulate but above all by its ability to encourage new solutions while preserving the integrity and security of financial systems. Only a balanced approach will achieve this ambitious objective.

To go further: cryptomonnaie.be — The Belgian cryptocurrency blog | Newsletter CryptoBelgique — Stay informed of news and updates