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. MiCA also covers stablecoins, referred to as e-money tokens (EMTs) or asset-referenced tokens (ARTs). Hence, what happens under MiCA if a crypto-asset is both decentralized and a stablecoin? The DAI, one of the oldest stablecoins is decentralized, and so is its replacement the Sky USDS.
The DAI’s governance body, MakerDAO, has been rebranded to Sky and token holders recently commissioned a legal report that concluded that the MiCA e-money token clauses do not apply to it, and EU exchanges can list it. An advisor to the European Commission who was involved in MiCA’s drafting asserted that exchanges can only list regulated EMTs and ARTs, saying it would be up to the European courts to decide, if in doubt.
A stablecoin not offered to the public by the issuer
Notably, one of the legal clauses at the center of the debate is the same one that regulator ESMA published a clarification on last week, emphasizing that EU crypto exchanges must de-list unregulated stablecoins (EMTs and ARTs). Tether is the biggest one this would apply to. At the time, we noted that the topic must be somewhat unclear, otherwise ESMA would not have needed to seek clarification from the European Commission.
The gist of that particular clause is that regulated EMTs are stablecoins that are 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.
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. That’s the path taken by the Sky lawyer, BCAS. However, the European Commission advised ESMA that crypto exchanges should only list regulated EMTs.
What if there’s no identifiable stablecoin issuer?
In a debate on LinkedIn, EU advisor Peter Kerstens said 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.” Mr Kerstens should be given credit for the extent of his engagement with the community.
However, that response attracted some ridicule. “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,” wrote Keir Finlow-Bates. We’d also note that the DAI was launched in 2017, 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. That 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:
- perform customer due diligence and AML
- assess the suitability of the stablecoin
- publish any adverse climate impacts of the stablecoin
- link to the stablecoin white paper.
The suitability assessment as outlined in MiCA is unlikely to be a challenge.
What about Tether?
There are two 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 also Tether.
Binance’s Head of Legal in Europe, Ben Bowden, noted as part of the Linkedin debate:
I absolutely have empathy for the difficulties of drafting. But the law as passed has been on the books for some time. Businesses surely have to operate based on what the law says, not their guess as to what the legislators intended?
