The Law of Algorithmic Stablecoins in the EU

Forthcoming in Banking and Finance Law Review: (2024) 41.1 B.F.L.R.

European Banking Institute Working Paper Series No. 184

Amsterdam Law School Legal Studies Research Paper No. 2024-43

Amsterdam Center for Law & Economics Working Paper No. 2024-15

31 Pages Posted: 6 Nov 2024 Last revised: 25 Nov 2024

See all articles by Edoardo D. Martino

Edoardo D. Martino

University of Amsterdam - University of Amsterdam Faculty of Law; European Banking Institute

Yannick Roos

University of Amsterdam - University of Amsterdam Faculty of Law

Date Written: November 06, 2024

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

Suggested Citation

Martino, Edoardo D. and Roos, Yannick, The Law of Algorithmic Stablecoins in the EU (November 06, 2024). Forthcoming in Banking and Finance Law Review: (2024) 41.1 B.F.L.R., European Banking Institute Working Paper Series No. 184, Amsterdam Law School Legal Studies Research Paper No. 2024-43, Amsterdam Center for Law & Economics Working Paper No. 2024-15, Available at SSRN: https://ssrn.com/abstract=5011467 or http://dx.doi.org/10.2139/ssrn.5011467

Edoardo D. Martino (Contact Author)

University of Amsterdam - University of Amsterdam Faculty of Law ( email )

Postbus 15654
1001 ND
Amsterdam, Noord-Holland 1001 ND
Netherlands

European Banking Institute ( email )

Frankfurt
Germany

Yannick Roos

University of Amsterdam - University of Amsterdam Faculty of Law ( email )

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
210
Abstract Views
662
Rank
317,489
PlumX Metrics