Are algorithmic stablecoins banned in the EU? Unpacking the MiCAR myth

The core of the misunderstanding lies not in the main articles of MiCAR, but in its introductory “recitals.” In EU law, recitals provide context and aid interpretation but are not legally binding rules themselves. The key to this puzzle is Recital 41, which outlines how algorithmic stablecoins should be categorized under the new rules.

Recital 41 essentially states that if so-called algorithmic ‘stable coins’ aim to maintain a stable value by referencing a currency or assets, they should be treated as either an Asset-Referenced Token (ART) or an E-Money Token (EMT), irrespective of their underlying mechanism. If they do not aim to stabilize their value by referencing assets, they fall under the general rules for other crypto-assets in Title II of the regulation.

This is not a ban. Instead, it forces most algorithmic stablecoins into a regulatory framework that was fundamentally designed for collateralized, asset-backed tokens. The requirements for ARTs and EMTs include holding liquid reserves, gaining authorization, and providing redemption rights at par. For a protocol that is, by design, not fully collateralized, meeting these obligations can be technologically and economically unfeasible. This creates a powerful *de facto* barrier, but it is a regulatory straitjacket, not a direct prohibition.

An ambiguous and complex framework

The approach taken by the EU has been criticized for creating a “complex and ambiguous system” that fails to target the specific risks inherent to algorithmic stablecoins, such as the potential for a “death spiral”. Rather than designing bespoke rules, MiCAR shoehorns them into existing categories.

Adding another layer of complexity is Recital 22. This recital exempts crypto-assets that are provided in a “fully decentralised” manner and have no identifiable issuer from the scope of MiCAR. Since the very ideology behind many algorithmic stablecoins is the pursuit of complete decentralization, this creates a significant potential loophole. Projects may be structured specifically to qualify for this exemption, allowing them to operate in the EU while sidestepping the demanding ART and EMT regulations entirely. What constitutes “fully decentralised” remains legally ambiguous, creating further uncertainty for developers and regulators alike.

How the EU compares to the US and UK

A brief look at other major jurisdictions highlights the unique nature of the EU’s position. The approach is far more direct and clear-cut in other parts of the world.

The proposed ‘Payment Stablecoins Act’ in the United States, for instance, takes a much more explicit stance. It specifically defines algorithmic stablecoins and effectively bans the issuance of new, “endogenously collateralized stablecoins”. This is a clear and direct prohibition on the type of mechanism used by protocols like the former TerraUSD.

The United Kingdom, on the other hand, has taken a more cautious route. Its Financial Services and Markets Bill (FSMB) currently excludes algorithmic stablecoins from its scope, with the Treasury noting that the technology is still evolving . This wait-and-see approach contrasts sharply with both the EU’s complex categorization and the US’s proposed direct ban.

The EU’s path is therefore a murky middle ground. By choosing interpretation over explicit rules, it has created a regulatory landscape that is difficult to navigate. This ambiguity leaves the door open for some protocols while making it nearly impossible for others to comply. The final version of MiCAR was a radical departure from the initial proposal, which had explicitly excluded algorithmic stablecoins from the ART/EMT rules, showing just how contested this issue was during the legislative process.

Ultimately, the claim that MiCAR “bans” algorithmic stablecoins is an oversimplification. The regulation does not contain a direct prohibition. Instead, it creates a challenging and ambiguous framework that forces them into categories not designed for them, while simultaneously offering a potential—albeit unclear—escape route through the “fully decentralised” exemption. The result is not a clear ban, but a regulatory puzzle that fails to adequately address the unique risks and innovations of these complex protocols, leaving their future in the EU uncertain.