While stablecoins are covered by the EU’s MiCA crypto regulations, it turns out that “payments” that use stablecoins without involving other cryptos are also subject to the EU’s payments legislation PSD2. This is problematic as it means that MiCA regulated crypto asset service providers (CASPs) that enable mainstream payments for their clients are additionally meant to register as a payment service provider (PSP). That’s a significant undertaking that also involves the company having extra capital in addition to the CASP requirements. One of the objectives of MiCA was to encourage innovation, hence this is not a desirable scenario.
Given this has been an area where the laws are unclear and there are 27 different national regulators, they haven’t all had the same views. So, at the behest of the European Commission, the European Banking Authority (EBA) published an opinion on the topic. The legal reason for these requirements is that electronic money tokens (EMTs) – the EU term for stablecoins – are classified as ‘funds’ under Europe’s PSD2.
Some exchanges might block the use of stablecoins for mainstream payments in order to avoid extra compliance. Alternatively, they might partner with a licensed payment provider, in which case the stablecoin transfers might cost more. The third option is to comply with certain parts of PSD2 legislation and apply for a license.
The EBA provides some relief
The EBA’s no action letter provides some relief, but until the law is changed it could dampen the mainstream usage of stablecoins outside the crypto sphere. However, the EBA’s guidance does provide some boundaries on when PSD2 applies.
The operative word here is payment. Transactions involving the exchange of a cryptocurrency for another cryptocurrency or the use of a stablecoin or other funds to settle a crypto transaction are not considered as payments falling under PSD2. In other words, CASPs would not have to worry about extra PSD2 compliance for these sorts of transactions.
To illustrate this distinction: if I wanted to use a crypto exchange to send some stablecoins to a friend, that’s a payment covered by PSD2. Any stablecoin balance I hold at a crypto exchange is also covered by PSD2.
Given the lack of legal clarity on this topic, the EBA has set a transition period until 2 March 2026 when CASPs engaging in mainstream payments either must register as a PSP, partner with a PSP or cease these types of payments. In the interim, it suggests that national regulators should deprioritize enforcement. Even once a CASP has a payments license, some aspects of PSD2 should be de-emphasized while others should be insisted upon.
The aspects it considers to be important are:
- strong customer authentication for accessing custodial wallets and the initiation of transfers
- fraud reporting
- cumulative calculation of own funds.
Beyond these priority areas, the EBA also addressed the longer term regulatory approach.
Fixing the legislative gap
The EBA noted that it’s undesirable to request an entity to get more than one license, especially as one of the goals of Europe’s MiCA crypto regulations was to encourage innovation.
At the same time, the EBA wants to ensure a level playing field, so payments made by any entity should receive the same protections. Hence, it made two proposals to rectify the situation for the long term. The first would be to transpose the relevant clauses of PSD2 into MiCA. Alternatively, work is in progress on the new PSD3 legislation, and it could be dealt with there. Another option is to give CASPs a free pass, which the EBA views as undesirable from a consumer protection perspective.
The impact on stablecoins
There are several takeaways from this outcome. Mainstream stablecoin transactions involving a European leg are likely to become more expensive. This supports the views of some stablecoin skeptics that the key advantage of the instrument is regulatory arbitrage. However, that position fails to recognize that they can be a more efficient form of payment and their programmability has yet to be fully exploited, including the potential for the stablecoin holder to control the programmability, rather than relying on a third party.
However, existing payment providers and banks won’t have any extra costs in handling stablecoins.
Banks aside, this regulatory overlap will likely increase costs for mainstream stablecoin transactions with a European component, potentially hampering adoption. This offsets the concerns raised by the European Central Bank (ECB) that the Trump administration’s promotion of stablecoins could threaten monetary sovereignty. We’ve previously noted there are some sovereignty safeguards in the MiCA regulatins.
From the ECB’s perspective, this could be viewed as a double benefit. They are not supportive of stablecoins, and this could possibly slow their growth. Plus, it gives the central bank more time to roll out its CBDC. However, if the sovereignty issue is diluted, it also reduces the urgency for digital euro legislation.
