Stablecoins are cryptocurrencies whose value is tied (“pegged”) to another asset. This asset can be a fiat currency, a commodity, another cryptocurrency, or a financial instrument.
The Markets in Crypto Assets (MiCA) regulation in Europe introduces three categories of stablecoins:
▶️ “Electronic money tokens” – crypto assets that stabilize their value by reference to only one fiat currency. Electronic money tokens can be used to make payments like traditional electronic money.
▶️ “Asset-referenced tokens” – crypto assets that maintain their value by reference to the value of several fiat currencies, cryptocurrencies, other assets, or a combination of such assets.
▶️ “Other crypto-asset tokens” – stablecoins that do not fall under the definition of “electronic money tokens” and “asset-referenced tokens.” It also includes utility tokens.
Stablecoins were created as an alternative to the high volatility of cryptocurrencies. They maintain their value with the use of various mechanisms. Stablecoins are designed to preserve their value irrespective of what the market trend by either:
✔️Keeping the equivalent amount of fiat currency or other assets as reserves.
✔️ Using sophisticated algorithms that match supply and demand to maintain a stable value (algorithmic stablecoins) in accordance to a fiat currency.
However, the collapse of the algorithmic stablecoin “Terra” along with the associated “Luna” token in 2022 proved that, in extremely adverse market conditions, algorithmic stablecoins could lose their “peg” with the fiat currency they represent, and ultimately crush.
Under MiCA, stablecoin issuers will be required:
- To be authorized or registered by a national competent authority and will be able to “passport” their services in all European Member States.
- To build a sufficient liquid reserve on the ratio 1/1 for “electronic money” tokens and “asset-referenced” tokens.
Algorithmic stablecoins will not meet these criteria and could be marketed as general “unbacked” crypto assets and cannot claim that their value is “pegged” to an official currency.
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