MiCA: What Happens if a Crypto-Asset Is Both Decentralized and a Stablecoin?

The first iteration of Europe's MiCA regulations for cryptocurrencies explicitly sidestepped decentralized finance, although when put under the microscope, many so-called decentralized entities might be found to be centralized.

Europe’s MiCA (Markets in Crypto Assets) regulations are set to come into effect in 2024, and they will introduce a comprehensive legal framework for cryptocurrencies in the European Union. However, there are still some questions about how MiCA will apply to certain types of crypto-assets, such as decentralized stablecoins.

Stablecoins are a type of cryptocurrency that is pegged to the value of a fiat currency, such as the US dollar. This makes them less volatile than other cryptocurrencies, and it also attracts a wider range of users. However, stablecoins are also centralized, which means that they are issued and controlled by a single entity.

MiCA includes provisions for stablecoins, but these provisions are mainly focused on centralized stablecoins, also known as e-money tokens (EMTs) or asset-referenced tokens (ARTs). The legal clauses that apply to EMTs and ARTs stipulate that they must be offered to the public by the issuer or where the issuer lists it on an exchange. Alternatively, a crypto exchange can choose to list the EMT itself with permission from the issuer.

If any of these apply, the issuer must be a bank or an EU regulated e-money issuer and comply with reserve and other requirements. However, there’s an argument that if the crypto exchange chooses to list the token without permission from the issuer, then the section relating to the EMTs does not apply to the issuer. That includes the need to register as an e-money provider.

This is the path taken by the Sky lawyer, BCAS, in the case of the DAI stablecoin. However, the European Commission advised ESMA (European Securities and Markets Authority) that crypto exchanges should only list regulated EMTs.

The DAI is one of the oldest stablecoins, and it is decentralized. Its governance body, MakerDAO, has been rebranded to Sky, and recently token holders commissioned a legal report that concluded that the MiCA e-money token clauses do not apply to it, and EU exchanges can list it.

However, an advisor to the European Commission who was involved in MiCA’s drafting has asserted that exchanges can only list regulated EMTs and ARTs, adding that it would be up to the European courts to decide, if in doubt.

This leaves us with a question: what happens under MiCA if a crypto-asset is both decentralized and a stablecoin?

A recent debate on LinkedIn highlighted this issue, with EU advisor Peter Kerstens stating that “there can not be any doubt about the legislator’s intentions,” that unregulated EMTs or ARTs should not be offered or listed for trading. However, he added that “Mica creates a legal fiction/fact that all EMT/ARTs must have an issuer, who is also the person/entity responsible for the reserve and complying with reserve and redemption requirements. The legislator never contemplated an EMT/ART in a decentralised/defi context.”

This response attracted some criticism, with Keir Finlow-Blow noting that it’s “like saying ‘The legislator never contemplated a form of transport that could go faster than a horse’ when trying to regulate cars and airplanes.”

It’s also worth noting that the DAI was launched in 2017, which is older than the USDC stablecoin, and for a long time the DAI was amongst the top three stablecoins in market capitalization.

BCAS lawyer Jonathan Galea highlighted that this situation had been considered. The MiCA introduction (recital) states:

Where crypto-assets have no identifiable issuer, they should not fall within the scope of Title II, III or IV of this Regulation. Crypto-asset service providers providing services in respect of such crypto-assets should, however, be covered by this Regulation.

Titles III and IV cover stablecoins, or ARTs and EMTs respectively. This might mean the DAI and USDS stablecoins don’t have to comply. However, the second sentence puts an obligation on exchanges or crypto-asset service providers (CASPs).

The BCAS report notes that to comply with this clause, exchanges must:

The suitability assessment as outlined in MiCA is unlikely to be a challenge.

There are two main issues here. One is whether exchanges can list unregulated stablecoins. The other is how decentralized stablecoins fall through the gap.

If these issues were to end up in court, the result might not be a slam dunk for DAI/USDS. For example, the BCAS opinion concludes that the Sky website is not an offer to the public, which could be debated. Plus, a recent S&P Global assessment of USDS raised questions about the degree of governance decentralization.

The problem is that the MiCA regulation doesn’t explicitly state that CASPs are not allowed to list unregulated stablecoins, even if that was the intent. Again, the fact that ESMA had to ask the European Commission underlines this point.

This aspect doesn’t just impact DAI/USDS but