Europe Tests Stablecoins Under New Crypto Rules

Europe is assessing how stablecoins could affect payments and financial markets after the European Union introduced rules governing their issuance, trading and use. Stablecoins are digital tokens designed to maintain a value linked to an official currency or other assets.

The EU’s Markets in Crypto-Assets Regulation, known as MiCA, began applying to certain stablecoin issuers on June 30, 2024. The broader framework for crypto-asset service providers took effect on Dec. 30, 2024.

MiCA covers asset-referenced tokens linked to more than one asset and electronic money tokens linked to a single official currency, such as the euro or U.S. dollar. Issuers must obtain authorization, publish information about their tokens and hold reserves to support redemptions. Electronic money token issuers generally must be authorized as a credit institution or electronic money institution. Holders have the right to redeem tokens at par value.

European regulators are examining the risks of tokens that become widely used for payments or hold large amounts of customer funds. A loss of confidence could trigger rapid redemptions and force an issuer to sell reserve assets. Other concerns include fraud, money laundering, cyberattacks and the use of stablecoins outside the regulated banking system.

Stablecoins could shorten settlement times and reduce costs for cross-border transfers, digital commerce and transactions between financial institutions. Euro-denominated tokens could provide a digital payment option linked to the single currency.

The market is concentrated in tokens linked to the U.S. dollar. European policymakers are assessing the effect of that concentration on the euro’s role in digital finance and on EU-based issuers competing with international providers.

The European Central Bank has warned that wider use of foreign-currency stablecoins could affect monetary policy and payment systems if European users and businesses adopt them for everyday transactions. EU officials have sought additional safeguards for tokens that could reach many users or become important to the financial system.

Banks, payment companies and crypto firms are assessing services involving stablecoins. Their ability to offer those services depends on licensing, reserve requirements, customer-protection rules and controls against financial crime.

MiCA does not prevent a stablecoin from losing its expected value. Its price can be affected by the quality and liquidity of reserve assets, the issuer’s operations and market demand. Users may face restrictions if a token is offered in Europe without the required authorization.