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The same EU that just did a u-turn to re-classify nuclear energy as a “green energy” source in the face of an energy crisis, wants to pick green winners and losers in cryptos.
The Markets in Crypto-Assets (MiCA) bill, a comprehensive cryptocurrency regulation, which was hammered out in late June, is being pushed by a new ECB (European Central Bank) report for quick passage by member states.
Among major issues addressed by the legislation include stable coins, which seek parity with currencies like the U.S. dollar or the Euro, and crypto consensus models.
One of the outcomes of the legislation, if approved, would be a bias against “proof-of-work” consensus mechanisms used by some crypto networks including the biggest of them all, Bitcoin.
The law would require businesses to record their energy use and emissions, and address environmental concerns around cryptocurrencies in other ways.
“Proof-of-stake,” used by Algorand, Polkadot and Cardano, among other public blockchains, is more favorably treated by the proposed law.
Ethereum, the largest crypto project that innovated with smart contract technology that allowed the network to host software “DApps,” was built using a proof-of-work consensus. But the network is on a progressive upgrade path to a proof-of-stake “Ethereum 2.0” that industry experts say will make the network more scalable and energy efficient.
Other crypto projects, like Solana and Hedera, use unique consensus mechanisms like “proof of history” and “gossip,” which require less computational power and thus less energy, similar to proof-of-stake.
Addressing Stable Coin “Contagion”
The ECB report noted that stablecoins have become a crucial mechanism in DeFi and other crypto trading activities. It referenced Tether as a stablecoin with a major role in those activities:
“Tether dominates trading volumes within the crypto-asset ecosystem, and stablecoins provide most of the liquidity for decentralised trading and lending.”
Stablecoin issuers would be required by MiCA to have sizable reserves and to regularly update their disclosure statements.
The ECB report specifies that because of the potential for contagion, stablecoins pose a particular danger to financial stability.
In the case of Terra LUNA, a decoupling from its U.S. dollar peg in early May precipitated by flaws in its algorithms, caused a crash that exposed a wider group of crypto firms and projects.
Effects of LUNA’s demise are still reverberating.
Stablecoin Strictures A Prelude to EU CBDC
Not surprisingly, the ECB report uses some peculiar reasoning to argue that stablecoins don’t meet “a practical means of payment for the real economy.”
Chiefly, the report argues: “European payment service providers (PSPs) are not very active in stablecoin markets and offer limited stablecoin payment services.”
The report also ties stablecoins to the “slow” Ethereum blockchain network, to argue that they are not suitable, though it admits that “this is changing.”
In fact, major stablecoins like USDT Tether are not only issued on Ethereum.
USDT is issued on Algorand, Avalanche, Bitcoin Cash’s Simple Ledger Protocol (SLP), Ethereum, EOS, Liquid Network, Omni, Polygon, Tezos, Tron, Solana and Statemine.
USDC is issued on Ethereum, Algorand, Solana and TRON.
The arguments of the report are pretty plainly framed to suggest that an ECB issued CBDC (Central Bank Digital Currency) is the real answer to the issue of stablecoins.
Notably, the top stablecoins are making efforts to be transparent about their backing reserves in the wake of the LUNA debacle.
Circle Internet Financial, a major firm behind USDC, reported at the end of June that it held 13.6 billion in cash and 42.1 billion in U.S. Treasury bonds, which together more than covered the current 55 billion value of total USDC tokens.
“While U.S. policymakers work to enact federal regulations for stablecoins, Circle continues to increase our transparency based on new industry innovations and what USDC holders within our ecosystem would like to see,” Chief Financial Officer Jeremy Fox-Geen said regarding the disclosure.
The full ECB report can be read here.