Potential Impact of Daily Transaction Caps in MiCA Legislation on Stablecoin Adoption

Potential Impact of Daily Transaction Caps in MiCA Legislation on Stablecoin Adoption

The Markets in Crypto-Assets (MiCA) legislation recently signed into law in the European Union has received positive feedback from the crypto industry. However, concerns have been raised about the daily transaction caps imposed on stablecoins, such as Tether (USDT) and USD Coin (USDC). Critics argue that these caps could stifle stablecoin adoption and have called for a revision of the framework. This article explores the implications of the caps and the need for potential changes to foster innovation and competition in the crypto market.

Stifled Adoption Due to Transaction Caps:

Chander Agnihotri and Rachel Cropper-Mawer, legal experts at Clyde and Co, have expressed concerns that the use of large stablecoins could quickly become stifled under the MiCA legislation. They suggest that regulators should revisit the daily transaction limits. Stablecoins were introduced as a solution to address the price volatility of cryptocurrencies like Bitcoin and Ether by mirroring the price of fiat currencies, primarily the US dollar.

Regulatory Focus on Private Stablecoins:

The collapse of Terra’s algorithmic stablecoin, TerraUSD (UST), and the brief depegging of USDC following the collapse of Silicon Valley Bank have heightened regulators’ concerns regarding private stablecoins. Agnihotri argues that regulators are justified in their laser-focused approach to regulating these stablecoins due to their stronger links to the traditional financial system through the use of reserves. The potential impact of the failure of a larger stablecoin has raised significant concerns among regulators.

Understanding the Transaction Caps:

The 200 million euro cap on daily transactions for private stablecoins like Tether and USD Coin is not equivalent to a ban, according to Cropper-Mawer. If the threshold is exceeded, issuers will be required to cease further issuing activities and work with regulators to bring transactions under the cap. However, with the increasing popularity of private stablecoins, it is expected that the use of certain larger stablecoins will quickly become stifled. Cropper-Mawer anticipates that legislators will revisit this issue in the future.

Potential Effects on Stablecoin and CBDC Markets:

The current rules could dampen stablecoin use, leading to the assumption that central bank digital currencies (CBDCs) may flourish at a faster rate. However, the lawmakers behind MiCA are likely aware of the potential negative impacts of these regulations, particularly when considering the prevalence of private stablecoins in other jurisdictions. Unfettered use of stablecoins in other markets could adversely impact the crypto market in the EU.

Feedback on MiCA and the Need for Adjustments:

Despite receiving some criticism, the majority of feedback on MiCA has been positive. Agnihotri notes that the legislation will provide startups and smaller entities with better access to the market, fostering innovation and competition. However, like any legislation, there are areas that could benefit from adjustments.

Potential Revisions and Continued Discussions:

Tether’s CTO, Paolo Ardoino, highlights the need for continued conversation and potential revisions of the MiCA framework before it is enacted upon private stablecoin providers. Further discussions on technical implementation standards are crucial to provide clarity to the market. Although Ardoino praises MiCA as a commendable initiative and comprehensive legislation, he acknowledges that the daily trading cap may impact private stablecoins like USDT.

Enforcement and Review of MiCA:

The success of MiCA will largely depend on its enforcement at the member-state level and ongoing review by lawmakers. Given the rapid pace of innovation in the crypto industry, it is important to continuously evaluate and update the regulations to ensure their effectiveness.

MiCA’s implementation following its publication in the Official Journal of the EU is expected to occur in 2024. While the legislation has been well-received, concerns remain regarding the daily transaction caps imposed on stablecoins. To foster innovation and competition, it may be necessary to revisit and potentially revise these caps. Ongoing discussions and clarity regarding the technical implementation standards will play a crucial role in shaping the future of stablecoin regulation in the EU.