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EU to be the first major jurisdiction to regulate Global Stablecoins
PAR002_123 • Sep 15, 2020
European Union members draw up regulation on Global Stablecoins
On 14 September 2020 following the Digital Finance Outreach Closing conference, a joint statement on Stablecoins was released by the ministers of finance for Germany, France, Italy, Spain, and the Netherlands.
The proposed draft of this regulation, which is available at 'https://www.politico.eu/wp-content/uploads/2020/09/CLEAN-COM-Draft-Regulation-Markets-in-Crypto-Assets.pdf'
has been leaked. Sven Giegold, a German politician and current member of the European Parliament, has confirmed this on his personal blog, accessible at 'https://sven-giegold.de/en/digital-finance-at-econ/'.
With the 167-page draft text, expected to be presented in the coming weeks, the EU will become the first major jurisdiction to regulate cryptocurrencies.
In response to the statement, European Commission EVP Valdis Dombrovskis noted the concerns of the ministers.
“Rest assured that our legislative proposals will address those concerns comprehensively,” said Dombrovskis.
He continued:
“Crypto assets provide many opportunities, and we want to regulate innovation in, not out.”
The draft proposal imposes lighter requirements on cryptocurrencies that pose lower risks. But rules will be stricter for “significant e-money tokens (described as ‘Stablecoins’)”, in terms of obligations.
The goal of the new rules is to provide legal certainty, support innovation, protect consumers and investors, ensure financial stability and market integrity, the document says. The need to regulate at EU level has also become more urgent given that some member states have started designing their own rules, including Germany, France and Malta.
A quick look at “The Proposal for A Regulation of the European Parliament and of the Council on Markets in Crypto-Assets (MiCA’)”, indicates that well needed changes relating crypto-assets are near. The proposal establishes several objectives, namely:
- Providing legal certainty
- Strict regulation of Libra & Co
- Creation of legal rules and mechanisms to ensure that third-country providers also comply
- Comprehensive rules on money laundering and customer identification
- Offering support and encouragement whilst promoting innovation and development
- Encourage more consumers and investors to part-take in this market
- Ensuring financial stability
- Single European supervision
- Virtual euro by the ECB
The joint statement stresses the importance of the framework to strengthen “Europe’s influence and consolidating its economic autonomy in the field of payments.” Above all, a Stablecoin regulatory framework must prioritise preserving monetary sovereignty and protecting EU consumers. As always, any plans should adhere to GDPR privacy legislation and anti-money laundering/counter-terrorism financing (AML/CTF) requirements.
The joint statement stresses five general principles,
1. The ability for the currency to be redeemable at all times into the asset-backed legal tender. (some Stablecoins don’t allow this)
2. Each Stablecoin must be backed at a ratio of 1:1 with fiat currency
3. Any assets eligible for the reserve must be limited to deposits in EU-approved credit institutions or a proportion in highly liquid assets that are subject to appropriate safeguards
4. These assets must be denominated in the Euro or the currency of an EU member state
5. The operating entity has to be based in the EU.
This last point comes at a crucial time as the EU makes preparations for deciding on whether to release a central bank digital currency (CBDC). The statement stresses that “no global asset-backed crypto-asset arrangement should begin operation the European Union until the legal, regulatory and oversight challenges and risks have been adequately identified and addressed.” By having Stablecoin firms be registered in the EU before starting any activity, the EU retains regulatory oversight, giving them control over authorisation timing. This means Stablecoins firms may be impacted depending on when the EU decides to issue CBDCs.
The other three requirements are that each Stablecoin must be backed at a ratio of 1:1 with fiat currency. Any assets eligible for the reserve must be limited to deposits in EU-approved credit institutions or a proportion in highly liquid assets that are subject to appropriate safeguards. These assets must be denominated in the Euro or the currency of an EU member state. The reserves must be segregated and be non-convertible to avoid exchange risk.
For the Libra Association, and issuers of ‘significant e-money tokens’, the path will be more difficult as they will also have to become a credit institution or an electronic money institution, facing stricter requirements compared with other digital operators offering financial services.
As a result, Libra and other ‘significant e-money tokens’ will fall under the supervision of the European Banking Authority. But the Commission will add an additional body, including national and European supervisors, to assist EBA in overseeing these systemic digital assets.
The EBA will chair this college of supervisors and will include, among others the national authority of the member state where the issuer of the significant e-money tokens has been authorised, the European Securities and Markets Authority (ESMA), the ECB or any other EU central bank, depending on the sovereign currency backing the digital token.
The draft text also obliges the Libra Association and the issuers other significant e-money tokens, to redeem, at any moment and at par value, the monetary value of the e-money tokens if the holders decide, either in cash or by credit transfers. The rules also impose the prohibition of granting any interests to holders of these digital assets.
The EU’s Digital Finance Strategy is expected to be released later this month.
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