MiCA vs. CBUAE: Stablecoin Regulations Transforming the Crypto Landscape

The regulatory landscape for stablecoins has been evolving rapidly across different jurisdictions. Two notable stablecoin regulations are the Markets in Crypto-Assets (MiCA) Regulation in the European Union and the UAE Central Bank’s Payment Token Services Regulation (referred to in this article as CBUAE Stablecoin Regulation).

MiCA, the EU’s comprehensive crypto law, was officially enforced in May 2023, representing a significant shift towards a unified regulatory framework for crypto assets. This regulation includes prudential and conduct requirements for both crypto asset issuers and service providers, aiming to establish harmonized rules across the EU. The specific provisions for stablecoins under MiCA were approved recently and came into partial effect in June 2023, with full compliance expected by July 2026.

The CBUAE published the UAE Payment Token Services Regulation on June 25, 2024. This regulation is a comprehensive framework for licensing and supervising digital payment services, including stablecoins. The regulation outlines conditions for providing payment token services, such as issuance, conversion, and custody of stablecoins, with a focus on maintaining a secure and efficient digital payment ecosystem.

Hong Kong has also been actively exploring regulations for stablecoins. In December 2023, the Financial Services and the Treasury Bureau (FSTB) and the Hong Kong Monetary Authority (HKMA) jointly issued a consultation paper proposing a legislative regime for stablecoin issuers. This proposal emphasizes licensing requirements, reserve asset management, and potential limitations on issuance volume.

EU and UAE Stablecoin Regulations: A Comparative Analysis

Types of Stablecoins and Issuers

MiCA: Distinguishes between asset-referenced tokens (ARTs) and e-money tokens (EMTs). ARTs maintain value by referencing assets like gold or a basket of currencies, while EMTs are pegged to any single official currency, including non-EU currencies. MiCA requires issuers to obtain a MiCA license for publicly offering or trading ARTs or EMTs within the EU.

CBUAE Stablecoin Regulation: Focuses on AED-backed stablecoins but also allows for the issuance of foreign currency stablecoins on a case-by-case basis. Entities wishing to issue Dirham stablecoins must obtain a license from the Central Bank.

Regulatory Requirements

MiCA:

This regime mandates the submission of a detailed whitepaper to regulators, outlining information about the issuer, the token, reserve asset management, and associated risks. Both EMTs and ARTs issuers are subject to prudential rules, governance requirements, and restrictions against granting interest on tokens. Issuers must hold at least 30% of funds received as deposits in credit institutions.

Issuers of non-EU currency-denominated EMTs have additional reporting requirements to provide detailed information on token activity, reserve assets, and transaction volumes. ART issuers must also disclose public information about the tokens in circulation and reserve assets.

While there is no issuance restriction for EMTs denominated in an official EU currency, MiCA-licensed issuers of ARTs and non-EU currency-denominated EMTs, however, are required to stop issuing tokens once they exceed either a daily value of transactions associated to its uses as a means of exchange of EUR 200 million, or 1 million transactions (on a quarterly average basis) within a single currency area within the EU.

CBUAE Stablecoin Regulation:

Emphasizes risk-based licensing, stringent oversight, and clear guidelines for managing reserves and redemption activities. Banks are permitted to invest up to 50% of their reserves in government securities. Custody and conversion of Dirham stablecoins require Central Bank licenses.

Foreign entities must register with the Central Bank but are not required to maintain capital requirements or onshore their reserves. For custody and conversion services of foreign stablecoins, custodians and exchanges licensed by SCA and VARA need only obtain a No-Objection Certificate (NOC) from the Central Bank, granting it access to off-chain data for security assessment.

Use of Stablecoins

The ability of stablecoins to be used as a means of payment for goods and services is a crucial aspect of their utility and adoption. The MiCA regulation in the European Union and the UAE Central Bank’s Payment Token Services Regulation provide distinct frameworks for how stablecoins can be utilized in this regard.

MiCA:

Asset-Referenced Tokens (ARTs): ARTs are not regarded as funds under MiCA, meaning they cannot be used as a means of payment. ARTs can only be used as a means of exchange, which limits their functionality compared to traditional currency or e-money. Holders of ARTs have the right of redemption in fiat equivalent to the market value of the assets referenced or the actual delivery of the referenced asset, but not at par value.

E-Money Tokens (EMTs): EMTs can be used as a means of payment for goods and services. They are considered a type of e-money, legally qualifying them as “funds” under the E-money Directive 2 (EMD 2) and the Payment Services Directive 2 (PSD 2). Holders of EMTs have a direct claim against the issuers for redemption at any time and at par value, without redemption fee charges.

Algorithmic Stablecoins: These stablecoins can fall under the definition of either ARTs or EMTs depending on their structure. If they do not fit into these categories, they must still comply with rules for “other tokens.” Hence, their usage depends on their classification as either ARTs or EMTs.

CBUAE Stablecoin Regulation:

AED-Backed Stablecoins: These stablecoins can be used for payments, tokenization, and cross-border transactions. The regulation outlines a clear path for these stablecoins to be integrated into the financial system, facilitating their use as a form of payment. Issuers must manage their Dirham reserves and redemption activities to ensure stablecoin stability and protect client funds.

Foreign Stablecoins: These stablecoins cannot be directly used for payments for goods and services within the UAE, ensuring the preservation of the country’s financial sovereignty.

Algorithmic Stablecoins and Privacy Tokens: The regulation prohibits the issuance, promotion, and performance of services related to algorithmic stablecoins and privacy tokens unless they are recognized as Dirham Payment Tokens or Foreign Payment Tokens.

Commodity and Crypto-Backed Stablecoins: These types of stablecoins are outside the jurisdiction of the Central Bank of the UAE and cannot be used directly as a means of payment. However, they face no restrictions for investment purposes.

The Influence of FATF

The differing approaches of the EU and UAE in stablecoin regulation can be partly attributed to their geopolitical contexts. The EU, being a long-standing member of the Financial Action Task Force (FATF) and a well-established financial bloc, might have a more mature and integrated AML/CFT framework. This could contribute to a seemingly less stringent regulatory stance on stablecoins within the EU.

On the other hand, the UAE, as an Arab nation that was recently removed from the FATF “grey list” in February 2024, might be more cautious in its approach. The desire to maintain its position and avoid scrutiny from the West could be a factor influencing the stricter regulations outlined in the CBUAE Stablecoin Regulation.

It’s important to note that both the EU and UAE prioritize anti-money laundering measures. However, UAE’ recent removal from the FATF grey list might lead them to take a more conservative approach to ensure continued compliance with international standards.

Impact of Stablecoin Regulations on the Digital Asset Space

Stablecoin regulations like MiCA and the CBUAE framework represent a necessary step toward a more mature digital asset space. Clear and consistent regulations can instill trust in the market, attracting more investors and users, which can boost liquidity. However, KYC/AML requirements may make the onboarding process more complex, though this can be offset by enhanced security and consumer protection. Clear regulations can attract traditional financial institutions, bringing in new users and capital. In terms of transaction efficiency, regulations aimed at creating a secure and efficient digital payment ecosystem can facilitate faster and easier transactions with stablecoins.

For Crypto-Asset Service Providers (CASPs), the dual classification of EMTs under MiCA can create confusion regarding licensing requirements, necessitating clear regulatory guidelines. The inconsistencies in how EMTs are classified across different EU legislations highlight the need for standardized definitions within MiCA or future revisions of European payment regulations. Regulating a rapidly evolving space like digital assets requires a cautious approach to ensure comprehensive oversight and consumer protection without stifling innovation.

The UAE’s focus on dirham-backed stablecoins creates a unique ecosystem where financial institutions, businesses, and consumers can transact with confidence. This nurtures a “robust domestic market” for stablecoins, leveraging the stability of the dirham with the efficiency of blockchain technology. The UAE stablecoin regulations allow foreign payment tokens for specific purposes, maintaining a symbiotic relationship between centralized stablecoins and decentralized crypto, which continues to drive innovation in DeFi and peer-to-peer transactions.