Europe is undermining its digital currency.

Mario Draghi’s perspective is accurate. Europe significantly restricts itself with high tariffs and regulations impacting the “most innovative part of the service sector – digital.” The European Union has established tariffs on stablecoins, a practical digital currency that could greatly enhance GDP.

The Promise of Stablecoins for Europe

Stablecoins represent digital currencies on blockchains, such as dollars, euros, or pounds, existing as cryptographic tokens. They are emerging as the next groundbreaking application in fintech, enabling peer-to-peer transactions without intermediaries in an instant and at minimal cost, facilitating global payments and functions like automated lending and trading in securities.

Stablecoins empower fintech companies to develop applications faster and at a lower cost than ever before. They enhance “open banking” by decoupling money from banks and payment processors along with their exclusive technologies. These digital currencies serve as “room-temperature superconductors” for financial services, eliminating obstacles in money flow and significantly driving GDP growth.

Stablecoins are not merely a theoretical financial concept. They allow a Polish worker in France to transfer euros home quickly and cheaply, rather than incurring expensive fees and delays. They also enable German start-ups to efficiently raise funds through automated issuance of compliant digital shares and debt without the burdensome manual paperwork.

To realize the advantages of stablecoins, Europe’s currencies need to be available both domestically and internationally as euros, zloty, and krona on-chain. Fortunately, Europe possesses an established legal framework for digital currency known as e-money, introduced in 2000. However, the downside is that Europe has complicated matters by encumbering e-money issued on-chain with excessive regulatory hurdles.

How MiCA Creates Unfair Barriers for Innovation

E-money represents a significant advancement in regulation, serving as a digital cash instrument for payments. Numerous companies, including PayPal, Revolut, and Wise, have effectively utilized e-money to accommodate millions of customers through billions of transactions online, via mobile, and with cards. E-money is essentially the pinnacle of stablecoin capabilities, perfectly suited for the on-chain economy.

The recently enacted EU Market in Crypto-Assets regulations (MiCA) mandates that stablecoins qualify as e-money. This makes sense since e-money predates both blockchains and MiCA as a “technically neutral” form of digital cash.

However, MiCA undermines the technical neutrality intrinsic to e-money, introducing tariffs and anti-competitive measures by adding further requirements for e-money on-chain.

For instance, MiCA designates banks as gatekeepers for issuers of e-money on-chain. In contrast to conventional e-money, which can be fully safeguarded in high-quality liquid assets like government bonds, MiCA compels stablecoin issuers to secure at least 30% of customers’ funds with banks, thereby necessitating income sharing with those banks. This creates a direct financial burden attributed to the banks.

The safeguarding requisites imposed by MiCA further increase the risks associated with e-money on-chain due to the unnecessary involvement of banks and their financial obligations. Such risks translate into a tariff, as e-money issuers are forced to maintain larger reserves.

The requirement regarding bank safeguarding is also legally questionable. It contravenes the European e-money directive’s explicit goal of promoting “fair competition” and a “level playing field” between e-money issuers and banks. Instead, the MiCA requirements distort this competitive landscape to favor banks.

Leveling the Playing Field

Critics in the U.S. often deride European regulations and observe the absence of stablecoin rules. Nonetheless, the previous administration prioritized establishing a stablecoin regulatory framework similar to Europe’s e-money to “ensure the dominance of the American dollar on a global scale” and to expand the digital use of the U.S. dollar.

In the meantime, the EU hampers its own progress by complicating existing e-money regulations, rendering them more costly, competitive, and risky for European stablecoins. As Draghi asserts, “A fundamental change in mindset” is crucial.

The solution is straightforward. First, the EU must eliminate the blockchain-specific stipulations tied to e-money and cut the unnecessary regulatory red tape from the otherwise reasonable MiCA regulations.

Second, the European Central Bank (ECB) and other EU central banks should further equalize the environment for banks and e-money issuers.

How can this be achieved? The ECB recently allowed non-bank fintechs, including e-money issuers, direct access to its payment systems, benefiting these issuers by enabling them to utilize the same core payment infrastructures as banks.

The ECB should take an additional step to grant e-money issuers direct access to its safeguarding resources. This proposition has already been suggested by leading economists from the IMF. Such a move would eliminate unnecessary intermediaries and tariffs between the ECB and euro stablecoin issuers, unlocking the complete potential of the on-chain economy for Europe and the euro.