Chasing the hottest trends in crypto, the EU works to rein in stablecoins and DeFi

The far-reaching framework, designed to bestow regulatory clarity upon digital finance businesses serving residents of the European Economic Area, is bound to be especially consequential for two interconnected domains of the crypto industry that have dominated the narrative throughout much of 2020: stablecoins and decentralized finance applications.

Under the proposed law, stablecoin issuers will have to be incorporated as a legal entity in one of the EU member states.

Stablecoins are widely considered to potentially bring significant benefits as a digital method of payment, providing for greater financial inclusion and a more efficient method of transferring funds.

Illustrating the depth of the top EU officials' concern over preserving the union's monetary sovereignty is the fact that, earlier in September, "Finance ministers of Germany, France, Italy, Spain and the Netherlands issued a joint statement outlining that stablecoin operations in the European Union should be halted until legal, regulatory and oversight challenges had been addressed," said Konstantin Richter, CEO and founder of the blockchain infrastructure company Blockdaemon.

MiCA opens with an explanatory memo that discusses how the crypto asset market is still too "Modest in size" to pose a serious threat to financial stability; however, things can change, the framers admit, with the advent of "Global stablecoins, which seek wider adoption by incorporating features aimed at stabilizing their value and by exploiting the network effects derived from the firms promoting these assets." There has been a single stablecoin project to this date falling into the scope of this description: Libra.

Stablecoins have grasped the attention of regulators over 12 months ago with the presentation of project Libra by Facebook and have since been closely monitored by the public and regulators around the world.

Regulators are realizing that stablecoins are bound to increase efficiency in the payment system - particularly the international one - and promote financial inclusion.

Stablecoins largely power another sprawling domain of crypto financial activity: a diverse array of applications and protocols that exist under the umbrella of decentralized finance.

Whether the European authorities will treat individual DeFi apps as CASPs remains an open question, but if this is the case, developer teams maintaining DeFi protocols might be forced to come up with workarounds that will stretch the notion of "Decentralized" incredibly thin.

In their response to the proposed regulation, members of the International Association for Trusted Blockchain Applications expressed their concern that MiCA could effectively bar European residents from participating in DeFi markets.