Stablecoins, digital assets pegged to a financial asset like the U.S. dollar, are becoming increasingly popular around the globe. Some people use them as a trading tool, others as store of value, and others to shield against inflation. But what’s good for people does not always translate into official acceptance. The more useful stablecoins become the more angst they induce from bureaucrats.
The latest handwringing comes from the European Union, where the Markets in Crypto Assets (MiCA) Regulation threatens to ban dollar-pegged stablecoins meeting certain thresholds. MiCA’s final version is reportedly six weeks away, and its consequences could be painful.
Monetary protectionism in crypto isn’t new, but has mostly been limited to authoritarian regimes. China is moving toward confining transactions to its central bank digital currency, monitored by the ruling party and likely incorporating social credit scores. El Salvador sought to move its citizens toward Bitcoin but strongly encouraged transactions through its state-sponsored digital wallet.
But now monetary protectionism has spread to the continent that birthed concepts like individual sovereignty and economic freedom.
Europe’s financial elite make no pretense their stablecoin ban is about anything other than control and entrenching the existing financial order against technological changes threatening to upend it.
A European Central Bank (ECB) report admits that policy makers have become “unsettled by prospects for abrupt and potentially irreversible changes to the financial system due to the existence of strong network effects in both payments and digital services.” That these changes would come from voluntary choices made by European individuals in what they regard as their best interests does not matter. Among the deleterious effects the ECB sees from stablecoins is a “threat to monetary sovereignty” that would impair “monetary policy” and possibly result in “digital dollarization.”
Presuming all this of this is true, the answer might be to formulate better monetary policy or create a business landscape conducive to providing Europeans better options than what is imported from the U.S. Instead, MiCA would impose limits on stablecoins that would effectively ban the current top three: Tether (USDT), Circle (USDC), and Binance (USDB). These three stablecoins account for 75 percent of crypto trading globally and dwarf their European competitors. For reference, EURS, the largest euro-pegged stablecoin, has a daily trading value of $21 million while Tether, the largest dollar-pegged is valued at $53 billion. Euro-pegged stablecoins comprise just 0.2 percent of the market.
What MiCA would mean for crypto in Europe is chaos as detailed by two trade groups, Blockchain for Europe and the Digital Euro Association in a letter opposing the MiCA regulation::
- Short Term: EU crypto investors would likely face extreme volatility in prices driven by dislocation effects.
- Medium to Long Term: Fragmented liquidity would make trading more expensive, reduce competition, and drag down on innovation in the EU. Small crypto projects will face higher barriers to getting their tokens listed, which would slow down the pace of innovation.
The letter goes on to warn the ban “would create incentives for users to move away from regulated service providers in the EU and into the unregulated space outside of the EU, whenever liquidity is more abundant, and would compromise the EU’s efforts to take advantage of the potential of crypto and blockchain.”
In this video, Blockchain for Europe Secretary General Robert Kopitsch explains the EU’s position.
Paradoxically, EU bureaucrats may get a boost from current U.S. administration, whose hostility to crypto is strong. Last November, U.S. financial regulators urged Congress to force stablecoin issuers into the staid, heavily regulated banking sector, which would limit their flexibility and effectiveness. The chances Congress will step in have shrunk.
This may augur more drastic administration measures from financial regulaturs, namely the Financial Stability Oversight Council. This body, created under the Dodd-Frank financial law, is empowered to take unilateral actions for systemic risks to the financial system, as it determines them. The more regulatory layers the administration creates the less attractive dollar-pegged stablecoins will become abroad and the more protectionist national and supra-national bodies are likely to become.
Financial regulators should place the well-being of the citizens in their jurisdictions first. For the EU this means allowing stablecoins, whatever their peg to compete.