EU Explores ‘One Leg Out’ Stablecoin Issuance—Regulatory Challenges Loom

Key Takeaways

• Under the EU’s Markets in Crypto Assets (MiCA) regulation, only companies registered in the EU can issue regulated stablecoins.
• The European Commission is exploring how to deal with stablecoins that are issued by both regulated and unregulated entities.
• The issue is especially pertinent for USDC, which is issued by Circle both in and outside the EU.

The European Commission is reportedly investigating a complex scenario involving the issuance of stablecoins by entities both within and outside the European Union.

The investigation is being carried out at the request of France’s Prudential Supervision and Resolution Authority (ACPR), which last year asked the European Banking Authority (EBA) to review how the EU’s Markets in Crypto Assets ( MiCA ) regulation applies to such a “one leg out” issuance model. 

Global Stablecoin Firms in EU Law

Under MiCA, only licensed, EU-based entities can issue regulated stablecoins. All other stablecoins are considered unlicensed and regulated crypto exchanges are therefore prohibited from listing them. 

This has caused significant uncertainty among EU crypto traders as currently, among the major stablecoin issuers, only Circle has received the necessary EU license. 

Against this backdrop, many crypto exchanges have moved to delist stablecoins, like Tether’s USDT, that haven’t been approved in the EU. 

However, even Circle’s USDC poses a challenge for the MiCA regime, as outlined by the EBA. Although it doesn’t name the company directly, the EBA’s review describes exactly the scenario in which Circle currently finds itself.

The One Leg Out Scenario

Circle currently operates an EU-based entity licensed under MiCA and a non-EU-based entity not regulated under EU law. However, USDC issued by either entity are completely fungible and otherwise indistinguishable.

As the EBA noted, MiCA doesn’t provide explicit guidelines for this “one leg out” model, only requiring an EU entity to issue stablecoins. 

Key questions the EBA is investigating include whether such an arrangement is legal under MiCA. If so, can coin redemption legally be administered by either entity? Or can EU and offshore-issued coins only be redeemed by the issuing body?

Finally, can tokens issued by the non-EU entity freely circulate and be traded in EU markets?

What Next for Stablecoins in the EU

If the European Commission finds shortcomings in Circle’s current model, it will have major implications for the future of dollar-denominated stablecoins in the EU. 

Already, MiCA threatens to lock some of the world’s most used stablecoins out of EU markets, potentially driving European users to unregulated exchanges. 

So far, Circle has been successful in navigating the new regulation, gaining a considerable advantage over its peers who haven’t registered under MiCA.

But the company doesn’t just serve the EU market. A two-tier system that distinguishes between MiCA-compliant USDC and coins issued elsewhere would undermine the borderless system that makes stablecoins so appealing, in the first place.

As the EBA noted, it could also provide regulatory arbitrage opportunities, given the higher bar for compliance mandated by MiCA versus elsewhere.