ESMA Targets Non-Compliant Stablecoins with Custody and Transfer Ban

The European Securities and Markets Authority (ESMA) has proposed a new rule that would ban non-compliant stablecoins from being used in custody and transfer services in the EU. This move is part of the ESMA's response to a review of the EU's Markets in Crypto-Assets regulation (MiCA), which aims to regulate the use of stablecoins in the EU.

Under the proposed rule, any licensed custodian or transfer service that offers non-compliant stablecoins would be prohibited from doing so. This would affect not only new customers but also existing holders who have stopped trading.

The ESMA argues that the lack of a clear prohibition on non-compliant stablecoins creates disparities between compliant and non-compliant issuers and facilitates regulatory arbitrage. The proposal would target professional services, not personal ownership, and would not ban personal ownership or freeze tokens.

A recent study by Nicola Borri and Kirill Shakhnov found that the trading of dollar-linked tokens USDT and USDC across 14 exchanges showed that regulated-facing exchanges had a relative trading shift, with USDC's share of combined USDT and USDC trading rising by about six percentage points.

The ESMA's proposal is a policy submission, not an enacted amendment, and it is now up to the European Commission to consider it and potentially turn it into a legislative proposal. If adopted, the proposal would require a way to return assets that a provider already controls, and would need to reconcile an end to custody with the return of clients' assets.