After more than two years, in October 2022, the European Council finally settled the approved text for the Markets in Crypto-Assets (MiCA) Regulation, making it one of the first attempts at regulating cryptocurrency markets. This means that crypto-assets, crypto-assets issuers, and crypto-asset service providers (CASPs) will be brought under a regulatory framework for the first time.
While it’s not expected to come into force until early 2024, MiCA aims to protect consumers and investors, and increase financial stability within the market, while at the same time not hampering innovation within the crypto and Web3 space.
What is MiCA?
The Markets in Crypto-Assets Regulation (MiCA) is set to be a new EU regulation that could be used as the blueprint for other jurisdictions to follow when regulating crypto-asset related activities.
MiCA is expected to cover several key areas including transparency, disclosure, the authorisation and supervision of crypto-asset services providers and issuers, and transactions. A registered office in one of the EU Member States, in addition to authorisation obtained from the relevant national competent authorities, will also be required to provide services in crypto-assets.
The EU aims to use MiCA to become an attractive place for crypto-asset service providers (CASPs) to do business globally, while preventing market abuse and protecting consumers from fraud, money laundering, terrorist financing, and other criminal activities.
What does MiCA mean for crypto?
Following the collapse of FTX, there has been a call to accelerate the regulation of crypto-assets. When it comes to what a crypto-asset is, MiCA defines them as “a digital representation of a value or a right which may be transferred and stored electronically, using distributed ledger technology or similar technology”.
As cryptocurrency payments sit outside of the clearing authorities that form the traditional global financial system, governments have raised concerns about transparency and the monitoring of crypto transactions. However, they have recognised the benefits of crypto, particularly for cross-border payments, where transactions can be executed almost instantly outside of the outdated and archaic correspondent banking system, leading them to develop Central Bank Digital Currencies (CBDCs). However, MiCA will not apply to CBDCs, giving Central Banks control over monetary policy and to safeguard against the risks of non-government issued crypto-assets.
Additionally, in order to minimise the environmental impact of crypto, crypto miners will be required to disclose their energy consumption.
Many businesses operating within the crypto space have welcomed MiCA, as not only does the legislation provide further legitimacy and credibility for CASPs, it also has the potential to enable innovation.
What crypto-assets does MiCA cover?
Broadly, MiCA is designed to provide a regulatory framework for digital assets that use Digital Ledger Technology (DLT), with a few notable exceptions. This is broken into three types of crypto-assets: asset-referenced tokens (ART), electronic money tokens (EMT), and other crypto-assets not covered by existing EU law.
Once implemented, MiCA will apply to anyone providing crypto asset services or issuing crypto assets operating in the EU. Crypto-asset service providers (CASPs) with more than 15 million users will be subject to a higher level of supervision.
As well as ‘traditional’ cryptocurrencies and tokens, including Bitcoin, Etherum, and XRP, MiCA will apply to a newly defined e-money token (EMT) (a token that isn’t e-money in the traditional sense, but has all the hallmarks of traditional e-money, though technically, they are backed by a single fiat currency and would also fall under the E-Money Directive, EMD2), and Stablecoins, which fall under asset-referenced tokens (ART).
Stablecoins will come up against increased levels of scrutiny under MiCA. When it comes to Stablecoins, a type of cryptocurrency pegged to an asset, such as USD or gold, issuers would be subject to liquidity requirements, meaning they would need to be able to prove they hold enough reserves to prevent their collapse. Stablecoins will also be supervised by the European Banking Authority (EBA).
When it comes to Non-Fungible Tokens (NFTs), MiCA does not explicitly cover these digital assets. The regulatory treatment of NFTs is complex, mainly due to their ability to take different forms, including avatars, artwork, music, collectibles, and tickets to name a few.
As already mentioned, Central Bank Digital Currencies (CBDCs) will not need to adhere to MiCA.
Although three types of crypto-assets will be subject to MiCA, as the market evolves, the rapid pace of innovation may result in gaps appearing in the legislation as new categories of digital assets emerge.
Will MiCA change the global crypto regulatory landscape?
Daniel Lee, Banking Circle’s Head of Web3 stated in a recent webinar that there are many activities that are illegal in other areas of the financial services industry, but not yet within crypto, and this must change quickly. Examples he provided included creating false markets, false trading, market rigging transactions, market manipulation, and making false or misleading statements. He believes that more regulation preventing this behaviour in the crypto world will have a significant impact on the number of bad actors in the market.
Daniel also explained that just as different traditional finance assets are covered under different regulations, the same principles should apply to crypto. New digital assets should be subject to new rules, not those built for other assets, as different assets behave disparately and pose different risks. Good crypto regulation requires something specific, not an over-encompassing regime.
And it’s not just MiCA regulation crypto companies may have to adhere to. Countries within the EU, including France and Germany, have indicated that there could be more stringent regulations to come.
In France, finance commission Senator, Hervé Maurey, proposed tightening crypto regulations after the FTX demise shook the sector, while in Germany, Mark Branson, President of BaFin, stated that while he welcomes MiCA, crypto regulation “needs a worldwide solution”.
In the UK, the Financial Conduct Authority’s recently appointed chair called for more regulation of cryptocurrencies in a cross-party Treasury select committee meeting, stating that cryptocurrency-related businesses were “deliberately evasive”’ while also sharing his view that the sector facilitated money laundering.
Meanwhile, in the US, Senator Elizabeth Warren said during a hearing of the key Senate Banking Committee recently: “It is time for Congress to make the crypto industry follow the same money-laundering rules as everyone else”. Crypto regulatory oversight is expected to be managed by the Securities and Exchange Commission (SEC). A bill on stablecoins is also expected in 2023.