EU prepares for crypto leap of faith

Hello and welcome to the FT Cryptofinance newsletter. This week, we’re looking at the EU’s new crypto rules.

The EU’s landmark regulation on crypto assets starts to come into effect over the weekend but its distorting effect is already being felt in the market.

The arrival of MiCAR — the Markets in Crypto-Assets Regulation — is worth marking. For better or worse, it is the first stab at a comprehensive framework for trading and owning crypto assets, or providing related services.

The first two of seven parts, covering stablecoins, come into effect on June 30 and the rest by the end of the year.

The regulation is intended to “unleash the full potential of cryptoassets” to help businesses and consumers, while also applying the same sort of legal protections that consumers in stocks and bonds receive. Its unspoken purpose was to hammer projects like Meta’s ill-fated Libra stablecoin into a tight regulatory box.

But on the eve of its grand entrance, MiCAR already looks dated and is likely to deter innovation and restrict EU citizens and companies from using products available elsewhere in the world, say critics.

As with all regulation, MiCAR struggles to keep up with market developments. It doesn’t cover staking, while service providers that offer a “fully decentralised” service, without any intermediary, are outside the scope of the rules.

But it already appears to be having an impact. Last month US group Paxos announced the creation of Lift, a stablecoin pegged to the US dollar that will offer holders a yield and which will be regulated out of Abu Dhabi. The EU was a no-go, according to chief executive Charles Cascarilla, because the regulations were “stifling”.

MiCAR prevents stablecoins from paying any type of interest, including staking rewards. Stablecoin operators such as Paxos also need to hold at least 30 per cent of their reserves in EU-recognised banks, potentially rising to 60 per cent depending on the size of the coin.

These days it’s not so easy finding banks willing to take on crypto business, creating a problem largely beyond the control of the companies that need to comply.

MiCAR also restricts stablecoin operators to a threshold of either 1mn transactions or just €200mn a day. Already more than 95 per cent of total stablecoin activity is in US dollar-denominated coins, such as Tether, USDC and Dai, and at the time of writing, more than $50bn has been traded in the past 24 hours.

“MiCAR doesn’t reflect reality on the ground,” said one executive at a stablecoin operator.

It is also leading to some impressive legal gymnastics. This week Swarm Markets, a Berlin-based crypto group, said it would begin trading gold, but with a twist.

MiCAR makes it difficult to launch asset-backed tokens, based on gold and other commodities, which are fungible, so the metal is represented on a blockchain as an NFT. Much like normal gold trading, the metal itself will sit in a vault in London.

“MiCAR doesn’t apply to cryptoassets that are unique and not fungible with other cryptoassets,” said Timo Lehes, managing director of Swarm.

It also potentially restricts other innovations. An emerging trend this year has been tokens that act like stablecoins but offer a type of interest to holders for lending them out. They include tokenised Treasury funds, run by the likes of BlackRock and Franklin Templeton, with the transactions recorded on blockchains like Ethereum. Some professional crypto traders and brokers are exploring their use as collateral in trading tokens.

MiCAR is an adjunct to existing EU markets rules. It is designed to capture financial assets that cannot be covered by the EU’s big post-2008 legislation such as Mifid II.

Tokens that offer a security-like yield, such as a reward for staking, would fall under Mifid II rather than MiCAR, regulatory experts say, and that requires most securities to be recorded in book entry form in a central securities depository.

That definition could prove problematic, as Ethereum may not qualify as a book entry CSD. If a digital CSD isn’t available then the tokenised security has to be converted back to an equity, thus rendering the process of putting the product on a blockchain a questionable exercise.

It’s not impossible, however. On Thursday, KfW issued a digital benchmark bond with a maturity of three years and coupon of 2.75 per cent through Deutsche’s Borse’s D7 digital platform, with the exchange operator’s Clearstream depository acting as the central register that tracks ownership.

But this centralised, tightly controlled digital ledger is far from the promised land of decentralised blockchains, widely-traded tokens and the freer movement of money.

MiCAR has other issues. Among them are — as with other EU regulations — problems over enforcement under the EU’s financial services passporting system, which allows companies to sell services approved by one regulator in all 27 countries. Historically, some companies have shopped around for the regulator most friendly to their business.

It is sometimes said of EU regulation that even the poorly thought-through bits are never repealed, only improved. In coming months the new European Commission will be setting out its agenda for the next five years. Expect “further enhancements to the digital finance strategy” to be part of it.

What’s your take? Email me at philip.stafford@ft.com

• The price of Solana jumped more than 8 per cent on Thursday after fund manager VanEck filed an application with US regulators for an ETF based on the token. It has asserted that Solana is a commodity like bitcoin and ether.

• On Monday Kanav Kariya, who spearheaded proprietary trader Jump’s move into crypto, said he had left the Chicago group. In a post on social media site X, he said he stepped down from his position as president of Jump Crypto “with a heavy heart and great excitement”.

Crypto can be traded 24/7 but it seems that people still like the weekends off. The share of weekly average volumes traded on Saturday and Sunday is ever dwindling, and the advent of spot ETFs has only accelerated the trend, according to data from Kaiko Research.

The 111th Tour de France gets under way this weekend, starting in the Italian city of Florence. To get in the mood here’s Claudio Chiappucci’s classic 1992 ride through the crowds in the mountains to Sestriere. If cycling isn’t your thing, there’s always a thoroughly absorbing tour around the greatest art collection in the world, at the Uffizi.

Cryptofinance is edited by Laurence Fletcher. To view previous editions of the newsletter click here.

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