Finance in Europe may face a demotion, risking it being relegated to a merely tokenized status within global financial systems.
Europe's Dollar-Denominated Stablecoin Regulation: A Tense Battle for Dominance
The regulation of dollar-denominated stablecoins in Europe is primarily governed by the EU's Markets in Crypto-Assets Regulation (MiCA), which came into partial effect in June 2024. MiCA mandates that stablecoins backed by fiat currencies, including USD, must be fully backed by liquid reserves on a 1:1 basis to preserve monetary sovereignty and financial stability.
A key controversy surrounding the EU stablecoin regulation involves the multi-issuance provisions and competition from US-based stablecoins. The US has developed a stringent federal regulatory regime with the Genius Act of 2025, requiring USD-backed stablecoins to be fully backed by liquid US Treasury assets.
From a regulatory perspective, the EU framework strictly prohibits certain types of stablecoins such as algorithmic versions and enforces high standards on backing and authorization that make multi-issuance more complex or constrained compared to some US models. This regulatory structure is designed to maintain financial stability and avoid fragmentation but may limit the flexibility and scale advantages that US-issued stablecoins enjoy.
In contrast, the US emphasizes federal licensing and supervision to prevent arbitrage and ensure a level playing field among stablecoin issuers, keeping innovation centered domestically. This approach has allowed US stablecoins to grow and become a significant part of the global financial landscape.
The regulatory and competitive tension is further highlighted by the supervisory bodies involved. In Europe, MiCA requires oversight from multiple bodies such as ESMA, EBA, ECB, and National Competent Authorities (NCAs). In contrast, the US has a more centralized approach with federal regulators, similar to the FDIC and Federal Reserve, overseeing the stablecoin industry.
This creates a challenging landscape for European stablecoin issuers, who must navigate a more complex regulatory environment while competing against US-based stablecoins that benefit from a larger domestic market and more unified federal oversight.
The ongoing implementation of MiCA provisions and the UK's regulatory alignment efforts are shaping the future of stablecoin regulation in Europe. The EU's approach prioritizes market integrity and monetary sovereignty, fueling the debate on how to effectively regulate and compete with US stablecoin issuers.
Meanwhile, the Genius Act in the US is moving towards integrating distributed ledger technology finance with systemic components of digital finance. Fundamental issues troubling other non-US regulators include the supervision of decentralized networks and the regulation of 'asset reference tokens'.
As the landscape continues to evolve, it is clear that the race for stablecoin dominance is far from over. The EU and the US are taking different approaches, each with its own set of advantages and challenges. The outcome of this regulatory battle will have significant implications for the global financial system.
[1] OMFIF's public blockchain working group explores the integration of public blockchain systems into traditional finance. [2] The European alternative to stablecoins is hampered by the fragmented sovereign bond market and similar long-running inadequacies in attempts to consolidate a single market for banking. [3] The European Central Bank is concerned that multi-issuance will enable non‐EU holders to redeem stablecoins via EU entities, potentially draining EU reserve assets and triggering liquidity crises. [4] The author of MiCAR has stated that multi-issuance was always intended to be allowed to prevent Europe from becoming a 'flyover zone' and getting left behind on DLT innovation. [5] The bigger problem for Europe is its dependence on American technology, defense, and to an extent finance, and it will take time and probably American tools to decouple from this in pursuit of strategic autonomy.
- OMFIF's public blockchain working group deliberates on the integration of public blockchain systems into traditional finance, hoping to uncover opportunities for synergy.
- The European alternative to stablecoins faces hindrances due to the dispersed sovereign bond market, and ongoing efforts to consolidate a unified single market for banking.
- The European Central Bank expresses concern that multi-issuance might allow non-EU holders to redeem stablecoins via EU entities, potentially draining EU reserve assets and causing liquidity crises.
- The author of MiCAR asserts that multi-issuance was intended to be allowed to prevent Europe from becoming a 'flyover zone' and lagging behind in DLT innovation.
- The larger challenge for Europe lies in its reliance on American technology, defense, and finance, and the pursuit of strategic autonomy will likely require time and possibly American tools for decoupling.
- AI insights gleaned from digitalization events in the field of finance and technology may provide valuable policy recommendations for navigating the regulatory tension between Europe and the US in the stablecoin market.
- While the Genius Act in the US endeavors to merge distributed ledger technology with finance, it faces the task of supervising decentralized networks and regulating 'asset reference tokens', issues that trouble other non-US regulators.
