Stablecoins regulation and compliance at European Union

PQA Labs
8 min readJan 2, 2025

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Learn more about MiCA ‘s transitional phased “Grandfathering” Clause

PQA Labs share MiCA regulation information

At this article, PQA Labs will deep-dive about stablecoins ‘s most updated regulation and compliance at EU region and understanding the legal and execution summary on it.

First at all, let’s review the market capital and use case in the past few years which tells us the necessary to complete the compliance on the crypto market by EU.

Stablecoins market Capital and Use case overview:

According to the 2024 Geography of Crypto Report released by Chainalysis shown, along with United States launched Bitcoin ETF at Jan 2024, the total value of BTC activities across all regions have significantly growth by compared with 2023. Especially in institutional-sized transfers and higher income countries like North America and Western Europe. On the other hand, stablcoins transfer also growth by compared with 2023 excepted large institutional (>10M). For institutional ($1m-10M) and small retail (>1k) have over 20% growth.

Source: Chainalysis

European central bank also claimed, The stablecoins market has increased significantly in the past two years. It was valued at about USD 160 billion in 2021. Almost 99% stablecoins capital ‘s ecosystem are pegged by US dollars. The largest market stablecoins, USD Tether and USD Coin, have a combined market capitalisation of about USD 120 billion. Euro pegged stablecoins are the second largest market segment, but their value is very limited (about €500 million). Their share is very small, at about 0.2% of the total stablecoins market which are EUR Tether and Stasis euro, that together account for about half of the total.

Back to 2019, G7 Finance Ministers and central bank Governors agreed that stablecoins — in particular, projects with global and potentially systemic footprints — raise serious regulatory and systemic concerns which included GSCs (Global stablecoins) could have negative influence on the transmission of monetary policy, financial stability and enhance the risk of the cross-jurisdictional regarding money laundering and terrorist financing at domestic and international environment. Besides, it may also challenges and impede monetary policy due to currency substitution.

On the other hand, the use of stablecoins may enhance financial inclusion, both in developed and developing markets, and might boost overseas payments in general and remittances in particular. Stablecoins may also have a positive impact on international trade, and may enhance the efficiency of cross-border payment in instant settlement, lower the cost of transaction and transparency.

To tackle above concerns, the European Commission proposal for a regulation on markets in crypto-assets to the European Parliament and the Council at Sept 2020. Besides of EU, the United Arab Emirates (UAE), Singapore, and Hong Kong also proposed and under review stablecoins regulatory frameworks.

In June 2024, Europe through MiCA (Market in Crypto Asset Regulation) framework began effect EU stablecoins market. Which impact the crypto market directly,

“Coinbase Europe, Coinbase Germany and Coinbase Custody International will delist Tether’s USDT and five other stablecoins on Dec. 13”, Coinbase told Cointelegraph.

“USDT remains supported for custody; deposits and withdrawals are not affected. Nonetheless, we encourage users to use USDC and EURI as these are MiCA-compliant stablecoins.” Said by Binance spokerperson during speaking to Cointelegraph.

MiCA ‘s transitional phased “grandfathering” clause.

Although MiCA applied from 30 December 2024, there have facilitations for existing crypto-asset service providers which is A grandfathering clause (Art. 143(3) MiCA).

Starting January 2025, Crypto Asset Service Providers (CASPs) must begin applying for licenses to operate within the EU. A grandfathering period of up to 18 months allows existing providers to continue operations while transitioning to full compliance. This provision permits EU member states to let existing crypto service providers operate from December 30, 2024, up to July 1, 2026, depending on each state’s chosen duration. However, this grandfathering period is not mandatory for all jurisdictions, meaning some EU member states may offer a shorter period.

List of Grandfathering period:

18 months: Czechia, Denmark, Estonia, France, Croatia, Cyprus, Luxembourg, Malta, Romania, Iceland

12 months: Bulgaria, Ireland, Greece, Spain, Italy, Austria, Slovakia

9 months: Sweden

6 months: Latvia, Hungary, Netherlands, Poland, Slovenia, Finland

5 months: Lithuania

TBC: Belgium, Germany, Portugal

During this transitional period, crypto holders may have limited protections under MiCA, and National Competent Authorities will primarily focus on existing local Anti-Money Laundering regulations. To ensure a smooth transition, businesses should start by determining their appropriate license category (e.g., exchange operator, custody service provider). Then, businesses should begin assembling required documentation, including proof of capital adequacy and governance structures and lastly, should make sure that all business processes align with AML and KYC regulations.

What is the definition of crypto by MiCA?

MiCA generally states that a crypto asset is a digital representation of a value or right that can be transferred and stored electronically using distributed ledger technology or similar technology. To govern crypto assets, MiCA classifies them into three groups:

  1. Utility Tokens: These tokens offer digital access to goods or services on distributed ledger technology. They are considered less risky with lighter regulatory requirements. The issuers must follow the obligations outlined in Title II of MiCA.
  2. Stablecoins:

2.1) Asset-referenced tokens — ARTs: each with specific regulatory requirements for issuers. These stablecoins aim to stabilize their value by referencing multiple assets, such as a basket of currencies, commodities, or other crypto assets. Examples are DAI and PAXCG.

2.2) E-money tokens — EMTs: are crypto-assets that aim to stabilize their value by referencing a single official currency, like the dollar or the euro. They function similarly to electronic money. Fiat-backed stablecoins like Tether’s USDT and Circle’s USD Coin.

3. Significant Tokens: The European Banking Authority has the authority to label tokens as “significant.” These tokens pose great risks to financial stability and consumer protection. MiCA outlines the criteria for identifying significant tokens. These assets are subject to the strictest regulatory requirements.

Does MiCA apply to NFTs?

MiCA does not automatically apply to NFTs (non-fungible tokens). The only instances in which MiCA will apply is if the NFT has characteristics that make it similar to one of the assets that MiCA governs. For example, MiCA rules might apply to an NFT that is like a utility token or a financial instrument.

Does MiCA cover Defis?

No, MiCA also does not cover DAOs, DeFIs or dApps (any other decentralized applications) that are fully or truly decentralized.

Which kind of CASPs (crypto-asset service providers) requires MiCA license?

  1. Custodial wallet
  2. Exchange (crypto to crypto /crypto to fiat)
  3. Centralized trading platform
  4. Crypto-asset advising firms and crypto-portfolio managers

What is the key regulate factors for stablecoins within MiCA ?

A clear aim of MiCA is to protect monetary sovereignty and finance. Therefore, MiCA seeks to establish mechanisms that ensure stablecoins remain pegged to the asset that they track, provide enhanced transparency and prevent market players from creating excessive risk, while also ensuring that the assets under custody are protected. stability of the EU market.

MiCA does not accept Seigniorage-style/algorithmic stablecoins as asset-referenced tokens as they don’t have explicit reserves that are tied to any traditional type of asset. This effectively means algorithmic stablecoins are banned under MiCA. For stablecoins recognized by MiCA, the new rules will require fiat-backed stablecoins to be backed by a liquid reserve that has a 1:1 ratio. (LINEKTerra is a group of algorithmic stablecoins, named according to the currencies to which they were pegged, for example, TerraUSD)

  • Adjustments are made on-chain,
  • No collateral is needed to mint coins,
  • Value is controlled by supply and demand through algorithms, stabilizing the price.

What is the regulation of stablecoins require for CASPs?

MiCA’s rules on issuing asset-referenced tokens (ARTs) and e-money tokens (EMTs) were enforced, and all businesses subject to these rules should now be in full compliance with them. This includes maintaining full liquid asset backing, submitting regular transparency reports, meeting capital requirements, preparing detailed whitepapers according to Article 6 of MiCA, and undergoing mandatory regular audits of reserves. Issuers must maintain sufficient reserves to cover all issued tokens and provide detailed information about token functionality, associated risks, and underlying technology.

CASPs must implement systems for exchanging personal data of both senders and recipients of crypto asset transfers to ensure transparency and prevent money laundering.

Given the complexity of Transfer of Funds Regulation (TFR) requirements, implementing all necessary system changes well in advance is crucial.

Ongoing compliance and regulation:

The Digital Operational Resilience Act (DORA) is an EU regulation that entered into force on 16 January 2023 and will apply as of 17 January 2025. It aims at strengthening the information and communication technology (ICT) security of financial entities in the remit of the 3 ESAs and making sure that the financial sector in Europe is able to stay resilient in the event of a severe operational digital disruption. DORA brings harmonisation of the rules relating to digital operational resilience for the financial sector applying to 21 different types of financial entities, of which 12 are in the remit of ESMA.

General compliance (July 2026)

By July 2026, all CASPs must achieve comprehensive compliance with MiCA requirements. This includes securing appropriate licenses from their National Competent Authority, implementing robust security protocols, and establishing operational standards that prioritize consumer protection and transparency.

All CASPs must demonstrate proper segregation of customer assets from company funds, maintain stringent data protection measures, and implement thorough AML/KYC procedures. To ensure compliance, businesses should conduct detailed internal assessments of their operational functions, security frameworks, and transparency practices well in advance of this final 2026 deadline.

Ongoing reporting and audits (June 2024 onwards)

Once the July 2026 deadline passes, all CASPs must actively maintain ongoing compliance with MiCA requirements. This includes regular submission of detailed transaction and trading volume reports, prompt reporting of security incidents, and maintaining comprehensive documentation of all compliance activities.

Stablecoin issuers must provide frequent transparency reports demonstrating their reserves are fully backed by liquid assets, while custodians must undergo regular audits to verify proper segregation and security of customer assets. To ensure continuous compliance, businesses should consider establishing dedicated compliance teams or partnering with regulatory specialists, and implement robust internal systems for tracking and documenting all compliance-related activities.

At PQA Labs, We offer a unique stablecoin PQUSD that is meticulously designed to maintain its value while being fortified by post-quantum cryptographic algorithms.

Coming next to deep- understanding the regulation and compliance of United States.

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PQA Labs
PQA Labs

Written by PQA Labs

PQA Labs offers a unique PQUSD stablecoin that is designed to maintain its value while being fortified by post-quantum cryptographic algorithms.

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