A potential solution for cheap pizza: stablecoins and the MiCaR
An outline of how stablecoins fit within the current Dutch regulatory framework and the proposed Markets in Crypto-assets Regulation
On 22 May 2010, the first “real-world” Bitcoin transaction was executed in Florida, USA, by transferring 10,000 Bitcoin for two pizzas, which would nowadays equal an amount of approximately 370 million Euro. If these pizzas would have been paid with stablecoins, this would have likely avoided the regret of discovering such transaction to be valued over half a billion Euro ten years later.
Over the last year, Bitcoin, Ethereum and other cryptocurrencies have significantly risen in value and proven to be profitable investments for crypto speculators. As a result, some cryptocurrencies seem to have surpassed their original goal as a means of payment by moving on to being seen as an investment-like asset. As a response to the volatility of such crypto-assets, stablecoins, which are designed to be inherently less volatile than other cryptocurrencies, have entered the crypto stage.
As the rise of stablecoins and other more reliable crypto-assets have further increased the popularity of the crypto market, the European Commission (EC) has proposed the Markets in Crypto-Assets Regulation (COM(2020)593) (the MiCaR) for the purposes of regulating crypto-assets, including the use of stablecoins. The MiCaR aims to regulate crypto-assets and related financial services which remain outside the scope of the existing European regulatory framework. In this blog we will briefly outline the regulatory framework for stablecoins under the current Dutch regulatory framework and the MiCaR, as also discussed in more detail in our recent publication in the Dutch Journal for Financial Law (Tijdschrift voor Financieel Recht) available via the link below.
Stablecoin or simply a stable coin?
Stablecoins are defined by the ECB as digital units that rely on stabilisation tools to minimise price fluctuations. Naturally, the stablecoin derives its name from the stability in value it offers compared to volatile cryptocurrencies. Stablecoins can be pegged to a stable asset that has intrinsic value (e.g. gold) or be backed by a central issuer. An example is the private stablecoin Tether, which is pegged to and backed by the US dollar. Generally speaking, the price stabilisation of a stablecoin may be achieved by a central issuer that buys or sells more of the pegged assets on its balance sheet, or by an autonomous (decentralized) algorithm that adjusts the mining-process (release) of cryptocurrency by tracking supply and demand.
(Future) regulation of stablecoins
Depending on the technical and functional design of the respective stablecoin, it may be subject to (laws implementing) EU-legislation, including AMLD5, MiFID2, PSD2, EMD2, UCITSD, AIFMD and/or the SIPS-regulation (of which only AMLD5 currently provides for a distinct regime for crypto-assets, focusing on virtual currencies). The MiCaR will introduce a new bespoke regulatory regime for cryptocurrencies and stablecoins alike. Its applicability to stablecoins is dependent on whether the stablecoin qualifies as an “asset-referenced token” or “electronic money token”. With regard to stablecoins, we made the following four observations:
The MiCaR-regime for electronic money tokens seems to favour e-money over electronic money tokens. The scope of the MiCaR is limited to stablecoins that do not qualify as financial instruments under MiFID2 or electronic money under the EMD2. However, once a certain stablecoin qualifies as an electronic money token under MiCaR, issuers of e-money-tokens may need to comply with both the EMD2 and the MiCaR. As this implies that payment technologies that solely qualify as e-money would only need to comply with the requirements of the EMD2, such seems to contradict with the self-declared principle of the EC that EU financial services law cannot favour one specific technology over another.
The definitions of asset-referenced and e-money-tokens do not fully seem to represent the technological reality. Some stablecoins may refer to one fiat currency (electronic money tokens), whereby the issuer may hold several fiat currencies, commodities or crypto-assets to stabilise the value of the token (asset-referenced tokens), such as the stablecoin Dai. It is unclear whether such a stablecoin would need to adhere to the regime for electronic money tokens or asset-referenced tokens.
It also seems somewhat unnecessary to use the element “stable” as part of the definition of asset-referenced- and electronic money tokens. The EC could simply mention that stablecoins should be backed by one or more other assets, as it is not crystal-clear which assets are considered stable or at what point in time such stability would actually be achieved.
There is currently no specific regime for stablecoins based on an algorithmic stabilisation mechanism under the MiCaR. In our view, some of these types of stablecoins also have the potential to be widely adopted among the general public, therefore justifying a separate regime under the MiCaR.
The EC has a done a great job by introducing the first bespoke regulatory framework for crypto-assets, but the current proposal for the MiCaR still raises some questions. Just like ordering pineapple on a pizza.
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Crypto market analysis: Facebook to launch US stable coin
The price of bitcoin has tumbled over 25% in the last seven days, hitting a low of $42,025 over the weekend, as investors took profits en masse.
Bitcoin, as well as peers such as ethereum which have also slumped by similar amounts in the last week, has sold off after a staggering run year-to-date which had seen it double since the start of 2021.
Amid a wave of profit-taking last week, much of the reason for the sell-off is being placed on Elon Musk, the Tesla CEO, after a series of tweets about bitcoin, its energy usage, and the company’s position in the cryptoasset.
‘We are concerned about rapidly increasing use of fossil fuels for Bitcoin mining and transactions, especially coal, which has the worst emissions of any fuel,” Musk tweeted.
‘Cryptocurrency is a good idea on many levels and we believe it has a promising future but this cannot come at great cost to the environment.
‘Tesla will not be selling any Bitcoin and we intend to use it for transactions as soon as mining transitions to more sustainable energy. We are also looking at other cryptocurrencies that use <1% of Bitcoin’s energy/transaction.’
Nonetheless, Musk himself seemed to counter many rumours this morning after clarifying that Tesla had not sold any of its bitcoin recently.
Having bottomed at $42,000, bitcoin bounced back to trade at $44,300 this morning, with ethereum at $3,376 having dropped to $3,095 at its low point.
Facebook to launch US stable coin
The group behind Facebook’s Libra project plans to launch a US dollar stablecoin after scaling back its global ambitions amid resistance to its plans in Switzerland.
The Diem Association, which was formerly known as Facebook’s Libra project and is made up of 26 financial firms and non-profits, said it was relocating its main operations from Switzerland to the United States in a statement.
It has said it will now run a blockchain-based payment system that allows real-time transfer of Diem stablecoins, with plans to register as a money services business with the US Department of the Treasury’s Financial Crimes Enforcement Network.
Stablecoins, digital currencies pegged to a fiat currency, are being used increasingly via numerous networks. California-based Silvergate Bank will issue the Diem USD stablecoin and manage the Diem USD reserve, with a pilot expected before a full rollout.
“We are committed to a payment system that is safe for consumers and businesses, makes payments faster and cheaper,” the association said.
EOS doubles after raising $10bn to launch exchange
EOS coin saw its price double in a day last week after the company behind the coin said it had raised $10bn to build a next-generation cryptocurrency exchange.
Block.one, the company behind the EOSIO software, said it was launching a subsidiary to create the crypto exchange, with billionaire backers including Peter Thiel among the investors in the project.
The platform, called Bullish Global, will be a blockchain-based exchange and is set to be released this year.
“Bullish’s balance sheet is strong, and its vertical integration offers stability and liquidity to the cryptocurrency space. I’m happy to join Bullish as an investor and advisor as it gets started on a long and fruitful journey,” Thiel was quoted as saying.
EOS’ price soared in response, jumping to a peak above $14 last week, before retreating back to trade around the $10.50 mark. It started May priced at just $6.
eBay to allow NFTs on the platform
eBay has said it will allow the sales of NFTs on its platform in the future amid a recent frenzy for the tokenised collectibles.
The e-commerce company is expected to slowly build up sales of digital collectibles on the platform, starting with a smaller group of verified sellers.
“In the coming months, eBay will add new capabilities that bring blockchain-driven collectibles to our platform,” eBay exec Jordan Sweetnam told Reuters.
eBay has already invested heavily in infrastructure for physical collectibles like trading cards, as well as items like sneakers and watches which they help verify for buyers.
The NFT market shows little sign of slowing, with British auction house Christie’s selling nine CryptoPunk NFTs for nearly $17 million last week, according to a tweet posted on May 12.
Ethereum founder Vitalik donates $1.2bn to India relief fund
Ethereum creator Vitalik Buterin has pledged $1.2 billion to India’s Covid-19 relief fund.
The 27-year-old programmer, who created ethereum in 2013, transferred new Dogecoin copycat Shiba Inu tokens which had been gifted into his Etherscan public wallet – which had a combined worth of more than $1bn dollars – to the India Covid Relief Fund.
Buterin handed the assets over to a relief project established by Polygon chief Sandeep Nailwal who created the fund last month in response to the coronavirus crisis in India.
Buterin had already personally gifted $600,000 to help kick off the fund previously.