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Regulation Of Stable Coins In The EU – Coin Rules must learn

 

Regulation Of Stable Coins In The EU - Coin Rules must learn


The values of stablecoins are pegged or equivalent to the value of fiat currency and other financial instruments.

Stablecoins are developed to serve as an alternative to other cryptocurrencies.

Stablecoins reserve assets as collateral to maintain price stability and use algorithmic formulas for its control supply.

The European Union’s Markets In Crypto Assets (MiCA) is the regulation that is expected to regulate the activities of crypto assets.

The European Council published the Markets in Crypto Asset (MiCA) proposal document on the 24th of November, 2021.

The MiCA policy paper used to be 187 pages and was expanded to 405 pages.

Stable coins rely on cash reserves, and if there is not enough cash in reserve for the token, it can lead to a financial crisis.

The cryptocurrency market and its activities are unregulated. All DeFi protocols, such as Stable coins that leverage blockchain technology, are decentralized.

While there are no direct regulations or central governance mechanisms in place, the Decentralized Finance (DeFi) has shown over time that it needs to be regulated by a strong institution.

In a bid to regulate the DeFi and cryptocurrency market, some Government agencies and institutions in the past have had laws and regulations governing the activities of crypto in their territory.

The latest among them that would be the spotlight of this article is the regulation of Stable coins in the European Union. We shall identify the regulation proposed by the EU and the possible effect on cryptocurrency in Europe and the world at large.

Stablecoins reserve assets as collateral in maintaining price stability or use algorithmic formulas for its control supply. Fiat collateralized, crypto collateralized, and algorithmic are the types of Stablecoin.

The most popular stablecoins leveraging blockchain technology include Diem, Tether (USDT), USD coin, Dai by MakerDAO, and others.

Since stablecoins are mostly pegged to a fiat currency, users can easily convert their money into crypto tokens and vice versa. The Stablecoin market capitalization is about $172 billion at the beginning of 2022.

The highlight of the Markets in Crypto Asset (MiCA) proposal document is that “only credit institutions and electronic-money (e-money) institutions” will be eligible to obtain a stable coin issuance license.

In actualizing the full potential of the regulation, the legislation will follow a three-way negotiation. The negotiation will involve the European Council, European Commission and the European Parliament.

A “Markets in Crypto Asset (MiCA)” paper of 187 pages existed before November 2021, when it was expanded to 405 pages and a 55-page supplement. The expanded version of MiCA divides the cryptocurrency into three buckets and addresses them separately.

Finally, stable coins rely on cash reserves. Imagine a scenario whereby the Stable coin does not have enough cash in reserve? It will lead to a cryptocurrency crisis, and the stable coin will absorb the available assets to rectify and cover up this crisis.

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