The Law of Algorithmic Stablecoins in the EU

Abstract

Algorithmic stablecoins are a specific subset of stablecoins employing algorithmic adjustments of supply and demand as the key stabilization mechanism. In the pursuit towards a fully decentralised means of payment, detached from collateral and solely stabilised by smart contracts and algorithms, algorithmic stablecoins pose unique risks and challenges due to their complex construction. This contribution explores the approach that is currently taken by regulators through exposing the unique risks posed by algorithmic stablecoins and arguing that these risks require a supplementary regulatory approach alongside existing proposals for regulation. We justify this by showing the complexity and diversity of fully algorithmic protocols and reveal where the dangers of these protocols originate. The article reviews the European Union’s Markets in Crypto-Assets Regulation (MiCAR) and determines its limited applicability to algorithmic stablecoins through general provision and crypto asset service providers. It briefly considers an international comparison by exploring different regulatory proposals from outside the EU with the aim to draw lessons to better assess MiCAR effectiveness. We conclude that MiCAR, despite being the most advanced and encompassing legislation in the area of crypto activities, does not target the specific risks of algorithmic stablecoins. Moreover, it creates a complex and ambiguous system with regards to the provisions applicable to algorithmic stablecoins and puts forward rules that are difficult to adapt or update via secondary legislation leaving room for further exploration of the regulatory framework to ensure safety and stability.

Keywords: Algorithmic stablecoins, MiCAR, financial stability, digital currency, crypto asset

JEL Classification: G23, G28, K23