The EU has always been at the forefront of cryptocurrency regulation, and its "Markets in Crypto-Assets Regulation (MiCA)" passed in October last year aims to establish a unified framework for regulating crypto-assets within the Union. Stablecoins are a type of cryptocurrency anchored to fiat currency or other assets, designed to reduce price volatility, improve payment efficiency, and promote financial inclusion. As stablecoins are linked to sovereign currencies, they have significant implications for financial stability and tax policies, making stablecoin regulation an increasingly important part of international cryptocurrency regulation. This article uses USDT stablecoin as an example to analyze the regulatory requirements for stablecoins in the MiCA legislation, as well as the impact of these requirements on USDT and its issuers, providing reference for other countries and regions in formulating relevant regulations.

1 MiCA: EU Crypto Assets Enter Unified Regulatory Era

1.1 Improvement of MiCA over the original regulatory framework

MiCA, proposed by the EU in September 2020 along with the "Digital Operational Resilience Act" (DORA) and the "European Digital Finance Strategy" (EDFS), collectively constitute the EU's digital finance strategy, aiming to build a secure, innovative, and inclusive digital financial market. MiCA is also the EU's first comprehensive regulatory framework for crypto-assets, covering aspects such as the issuance, trading, and provision of crypto-assets, with the goal of establishing unified and transparent cryptocurrency regulatory standards and requirements within the Union.

Compared to previous regulatory schemes, MiCA will broadly cover unofficial crypto-assets, including stablecoins and utility tokens often mentioned in the industry, while the EU's previous regulatory framework only covered some crypto-assets with financial instrument attributes. The MiCA legislation classifies crypto-assets based on whether they are anchored to other assets to determine their value, in order to differentiate the risks and challenges faced by different types of crypto-assets and formulate corresponding regulatory requirements:

Electronic Money Tokens: Crypto-assets pegged to a single fiat currency, intended as electronic substitutes for cash, and can be used for payments or transfers. For example, electronic money tokens pegged to the euro fall into this category.

Asset-Referenced Tokens: Crypto-assets pegged to multiple fiat currencies or other assets, intended to maintain stable value.

Other Crypto-Assets: Any crypto-assets not belonging to the first two categories, including most cryptocurrencies and utility tokens. Bitcoin, Ethereum, etc., fall into this category.

From MiCA's classification of crypto-assets, it is clear that its regulatory focus is on electronic money tokens and asset-referenced tokens, rather than other crypto-assets. Therefore, MiCA explicitly states that security tokens and other crypto-assets regulated by existing EU financial regulations are not subject to MiCA regulation.

At the same time, MiCA imposes stricter requirements on crypto-asset issuers and service providers, including licensing, reserves, information disclosure, and governance structure, while the previous EU regulatory framework (5AMLD) only had some basic rules on anti-money laundering and consumer protection. Furthermore, as a mandatory EU law, MiCA will empower EU-level regulatory agencies with a range of supervisory and enforcement powers, such as allowing the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) to regulate issuers and service providers of significant asset-referenced tokens and significant electronic money tokens, including approval, suspension, or revocation of their licenses, and conducting regular inspections. For more information on the MiCA framework and its historical background, interested readers can refer to TaxDAO's previously published articles "EU Crypto Regulation Entering a Unified Era: Historical Review and Future Prospects" and "Interpretation and Comparison of the EU "Markets in Crypto-Assets Regulation (MiCA)".

1.2 MiCA's Regulatory Requirements for Stablecoins

MiCA's regulatory approach to the two types of stablecoins is largely similar, with differences in specific regulatory details. In general, its regulatory requirements can be summarized as follows.

First, management and authorization within the EU. MiCA stipulates that crypto-asset service providers must have a valid place of management within the EU, and at least one director must reside in the EU. A valid place of management refers to the location where necessary key management and business decisions are made. All entities providing stablecoin services within the EU must obtain EU authorization and comply with EU unified regulatory rules, such as capital requirements, governance arrangements, risk management, information disclosure, customer protection, anti-money laundering, and counter-terrorism financing. Additional regulatory measures will apply if the stablecoin is classified as a significant asset-referenced token or electronic money token.

Second, issuance regulation. All entities issuing or providing stablecoins must publish a white paper within the EU and report to the relevant competent authorities. MiCA specifically lists the information requirements and risk disclosures for stablecoin white papers. Additionally, MiCA regulates the issuance and marketing process of stablecoins to reduce the risk of financial fraud.

Third, reporting obligations. For asset-referenced tokens with a total issuance value exceeding 1 billion euros, MiCA imposes strict reporting obligations, requiring VASPs to report the number of holders, the value of the issued asset-referenced tokens, the scale of asset reserves, the average daily transaction quantity, average total value for each relevant quarter, and the estimated average daily transaction volume and average total value for use as a single currency within the euro area during a relevant quarter.

Fourth, liquidity reserve obligations. MiCA requires token issuers to establish sufficient liquidity reserves to protect consumers. For asset-referenced token issuers, the minimum amount held as deposits for each fiat currency must not be less than 30% of the reference amount published by the EBA. Token holders also have the permanent right to redemption, and the rules governing the operation of reserve funds will provide sufficient minimum liquidity. All stablecoins will be regulated by the European Banking Authority (EBA).

Fifth, scale limits. MiCA stipulates that the daily transaction quantity and transaction volume of non-euro-supported asset-referenced tokens should not exceed 1 million transactions and 200 million euros. When the estimated average daily transaction volume and average total value from the second item exceed the above standards, MiCA requires the issuer to cease issuance of the token and submit an improvement plan to ensure that the average daily transaction volume and average total value of the stablecoin in future quarters remain below 1 million transactions and 200 million euros, respectively. MiCA uses this limit to prevent non-euro-supported asset-referenced tokens from potentially impacting euro area monetary policy and financial stability.

2 USDT: Leading Stablecoin and Its European Business

USDT is a digital currency token anchored to the value of the US dollar, issued and managed by Tether (formerly known as RealCoin). Tether's parent company, iFinex, was established in Hong Kong in 2012, and its management team includes Jan Ludovicus van der Velde (CEO), Giancarlo Devasini (CFO), Philip Potter (CSO), and others. In 2014, RealCoin was rebranded as Tether and announced a partnership with the Bitfinex exchange (the largest cryptocurrency exchange in Europe and a subsidiary of iFinex). Tether's primary banking partner, Noble Bank, is a registered entity in Puerto Rico.

USDT was one of the earliest stablecoins to be accepted and used in Europe, known for its stability. Tether claims that each USDT is backed by one US dollar or an equivalent asset and can be redeemed at any time. Tether also claims that its reserve assets are regularly audited by third-party audit firms, and the data on its reserve assets and issuance are published on its official website. However, the authenticity and transparency of Tether's reserve assets have been questioned, and rumors of its involvement in manipulating Bitcoin prices have been widely discussed.

Nevertheless, due to its low volatility, high liquidity, and cross-chain compatibility, USDT has become the most popular and widely used stablecoin in the current cryptocurrency market. In terms of its use in the EU, USDT can be traded on several EU-licensed cryptocurrency exchanges or platforms, such as Uphold, Bitfinex, Binance, and others, with the trading volume of USDT on these exchanges accounting for more than half of the global USDT trading volume.

3 How Does MiCA Affect Stablecoins Represented by USDT?

3.1 Impact of MiCA on the Stablecoin Market

As mentioned earlier, the MiCA legislation will impose strict restrictions and regulations on stablecoins not supported by the euro. The most noteworthy provision is the trading limit for non-euro-supported asset-referenced tokens. These tokens refer to those not anchored to the euro or the fiat currency of a euro area member state. These stringent regulatory requirements will weaken the liquidity of the stablecoin market and shrink its scale.

Regarding electronic money tokens represented by USDT, MiCA stipulates that "electronic money tokens should be considered as electronic money," and "the issuer of electronic money tokens should issue electronic money tokens at face value and upon receipt of funds." This means that the issuer of electronic money tokens should issue stablecoins at a 1:1 ratio, legally clarifying the issuer's reserve asset obligations. Furthermore, MiCA also specifies the reserve funds for electronic money tokens. Firstly, MiCA requires that at least 30% of the funds received by the issuer be kept in an independent account at a credit institution, meaning that the issuer must maintain a 30% reserve for investors to redeem tokens at any time. Additionally, MiCA imposes strict restrictions on the use of remaining funds other than the reserve, requiring the issuer to "invest in safe, low-risk assets" that meet the conditions of high liquidity financial instruments with very low market, credit, and concentration risk, priced in the official currency equivalent to the electronic money token. It is evident that the main purpose of these measures is to enhance market stability and reduce risk.

According to data from CoinGecko, as of October 8, 2023, USDT accounts for 73.5% of global cryptocurrency trading, far exceeding other stablecoins or fiat currencies. Due to its significant volume, it will be considered a significant electronic money token by the EU, and will be directly regulated by the EBA, subject to stricter regulatory measures such as undergoing independent audits every six months.

3.2 Impact of MiCA on Stablecoin Issuers

The new regulatory rules under MiCA will pose significant compliance challenges for Tether, especially considering Tether's historical lack of complete transparency in disclosing its reserve status and composition, and its lack of audits by more authoritative independent institutions. Tether has also been involved in multiple lawsuits and investigations, including reaching a $18.5 million settlement with the New York Attorney General's Office and rumored investigations by the US Department of Justice for alleged bank fraud, money laundering, and illegal operations. In the future, stablecoin issuers represented by Tether will face higher compliance reform costs. Tether should actively promote its own compliance process, establish good cooperation with EU regulatory agencies and third-party audit firms to enhance its market reputation and competitiveness.

In the face of increasingly stringent regulatory requirements, Tether has taken measures to advance its compliance process, such as recently announcing a partnership with the Italian branch of BDO International, the world's fifth-largest accounting firm. In the future, the latter will be responsible for auditing the company's reserve fund assurance and producing audit reports, with plans to change the release frequency of audit reports from quarterly to monthly. Under the framework of MiCA, stablecoin issuance will become more compliant and transparent.

[1] EU. (2023). REGULATION (EU) 2023/1113 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL.

[2] TAXDAO. (2023). Interpretation of the EU "Markets in Crypto-Assets Regulation (MiCA)": Implementation Background, Main Content, and Comparison with Similar Types.

[3] TAXDAO. (2023). Cryptocurrency "Double-Edged Sword" to Face Legislative Regulation? Current Situation and Prospects of Stablecoin Regulation.

[4] Liu, L., Zheng, Y. Q. (2023). Interpretation of the EU "Markets in Crypto-Assets Regulation (Draft) (MiCA)".

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