Can MiCA Take Europe to the Crypto Promised Land?

In Europe, the end of the 'crypto wild west' is here. Or, at least, so believes the French Finance Minister, Bruno Le Maire.

Le Maire’s projection comes on the heel of the progress made by the European Union (EU) on the Markets in Crypto-Assets regulation (MiCA) proposal.

MiCA, a component of the EU’s digital finance (DigFin) package, seeks to regulate issuers of stablecoins and other unbacked crypto-assets such as Bitcoin. It also wants to bring operators of crypto-asset trading venues and wallets within its ambit.

On June 30th, the Council of the European Union announced that the Council Presidency and the European Parliament, the two legislative bodies of the European Union (EU), had finally reached a provisional agreement on MiCA.

Discussions on MiCA started in September 2020 after the European Commission, the executive arm of the EU, presented MiCA for legislative deliberations.

The Council explained that MiCA will protect investors and preserve Europe’s financial stability while also giving room for innovation and making the region’s crypto-asset industry attractive.

“This [MiCA] will bring more clarity in the European Union, as some member states already have national legislations for crypto-assets, but so far there has been no specific regulatory framework at the EU level,” the Council of EU explained.

The “landmark regulation,” as Maire puts it in the statement, is being positioned to set up the EU as a standard-setter for the digital asset industry.

“MiCA will better protect Europeans who have invested in these assets, and prevent the misuse of crypto-assets while being innovation-friendly to maintain the EU’s attractiveness,” Maire said.

Over the years, industry stakeholders and regulators alike have clamored for regulatory oversight to curtail the vulnerabilities of the emerging cryptocurrency industry.

In light of the recent Tether-LUNA crash, efforts to put the industry under check have become even more intense with the G7 countries in May calling for swift, comprehensive regulation of crypto assets.

In fact, last week, the Financial Stability Board, the international body that monitors and makes recommendations about the global financial system, called for international regulation and supervision of crypto-asset activities.

The European Union believes with MiCA, it can secure Europe’s place in this emerging market that is redefining finance and monetary systems across the world.

MiCA’s Lofty Goals

Although MiCA, which is expected to come into force in 2023-2024, is still undergoing the EU’s trilogues and legislative procedures, the Council of the EU has outlined some of the key regulatory focus of the proposed legislation.

Summarily, the goal of MiCA is to protect European consumers, enshrine environmental sustainability, and prevent money laundering in the crypto industry.

The EU says it wants to bring all national legislations of member countries on cryptocurrency into uniformity through MiCA.

So, under MiCA, member countries will be required to follow the block's regulatory provisions. For example, an authorization license for a crypto asset service provider (CASP) must be issued within a timeframe of three months.

National authorities will be required to transmit regularly relevant information on their largest CASPs to the European Securities and Markets Authority (ESMA), an independent EU authority.

The EU also wants to shield individual investors in the region against some of the risks such as fraud associated with crypto assets.

According to the provisional agreement, MiCA will fight market abuse, such as market manipulation and insider trading that exploit European consumers.

“Currently, consumers have very limited rights to protection or redress, especially if the transactions take place outside the EU,” the Council said.

“With the new rules, CASPs will have to respect strong requirements to protect consumer wallets and become liable in case they lose investors’ crypto assets.”

Holger Arians, the CEO of Banxa, a Web3 on and off-ramp solution, believes that this provision is one of MiCA’s 'several core strengths'.

“Its [MiCA] anti-market abuse provisions are a major step forward in combating insider dealing in crypto markets,” Arians told Finance Magnates.

“Requiring official white papers for traded coins is critical for transparency. Overall, the standards that MiCA sets safeguard customer funds in cases of insolvency,” the CEO added.

MiCA also has its eyes on stablecoins, the cryptocurrency pegged against fiat currencies such as the dollar to remain stable. This is because of the possible impact stablecoins can have on traditional financial markets. The recent Luna crash probably drives home the point faster.

Due to risks, MiCA's current provision agreement requires stablecoin issuers to establish their presence in any of the EU countries. Issuers will also be asked to insure stablecoin holders by building up a 'sufficiently liquid reserve'.

This reserve, which is to be partly in the form of deposits, is to be based on a 1/1 ration.

“Every so-called stablecoin holder will be offered a claim at any time and free of charge by the issuer, and the rules governing the operation of the reserve will also provide for an adequate minimum liquidity,” the Council said.

However, Jeffrey Blockinger, the General Counsel of Quadrata, a Web3 passport network that enables traditional institutions to enter the world of decentralised finance (DeFi) and crypto, posits that “some of the stablecoin rules look like they could be unworkable.”

Blockinger, who is also a former CEO of the Association for Digital Assets Markets believes that the disclosure requirements for coin offerings and listings and MiCA’s oversight on crypto asset service providers should help legitimize the asset class for investors sitting on the sidelines.

Furthermore, MiCA wants to confront some of the climate-change-related concerns stakeholders have against the use of digital assets, especially how some cryptocurrencies such as Bitcoin are created through a power-draining consensus mechanism called Proof-of-Work (PoW).

The Council says the European Commission, the union’s executive arm, will be tasked with setting up mandatory minimum sustainability standards within two years.

Still, on safety, anti-money laundering (AML) and countering the financing of terrorism (CFT) come into view under MiCA. CASPs will be required to watch out for possible money laundering in line with the EU’s AML framework.

This oversight will cover CASPs whose parent companies are located in countries listed on the EU list of third countries considered at high risk for anti-money laundering activities. Additionally, it is applicable in the EU list of non-cooperative jurisdictions for tax purposes, it said.

To achieve this, the trade bloc explained, the European Banking Authority, the independent regulator of the European banking sector, will be tasked with maintaining a public register of non-compliant CASPS.

However, MiCA makes an exception of non-fungible tokens (NFTs) which are digital assets used to show ownership of unique items. The EU says the creation of separate legislation will be delegated to its commission.

“Within 18 months, the European Commission will be tasked to prepare a comprehensive assessment and, if deemed necessary, a specific, proportionate and horizontal legislative proposal to create a regime for NFTs and address the emerging risks of such a new market,” the trade bloc explained.

Experts who spoke to Finance Magnates believe that leaving out NFTs from the regulation's ambit is not a wise move.

“The rationale for placing NFTs outside the scope of the proposals is not clear. MiCA may have missed an opportunity to mitigate a potential NFT-base speculative investment bubble,” Vince Howard, the Marketing Director of Opis Group Limited, a British blockchain technology company, told Finance Magnates.

Moreover, Arians believes the EU could benefit from further scrutiny in the areas of NFTs and DeFi.

“As increasingly large segments of the [crypto] market, regulators will need to provide legislative clarity that pertains to NFTs and DeFi respectively,” the Banxa CEO said.

Europe’s Crypto Regulatory Landscape

According to the 2022 Global State of Crypto report by Gemini, the adoption of cryptocurrency in Europe (17%) is in line with developed nations, including Australia and the United States, where 18% and 20%, respectively, have bought crypto.

However, when compared to the global average (23%), cryptocurrency ownership in Europe is lower.

Due to the uncertainties many have about cryptocurrencies, countries in this region appear to be moving at different paces or taking different approaches to crypto regulation.

“Europe's crypto regulatory landscape is still in its early days,” Isaac Tebbs, the Founder of CryptoBoost, told Finance Magnates.

“There are a few countries like Malta and Switzerland that have been very welcoming to crypto businesses and have created a regulatory framework for them,” Tebbs said.

In September 2020, Switzerland passed the Blockchain Act, becoming one of the first countries in the world to enact legal regulations for blockchain technology.

The Act permits the operation of licensed cryptocurrency exchanges and subjects crypto assets to AML/CFT compliance procedures.

While Switzerland is seen as one of Europe’s top crypto-friendly countries, France’s regulatory approach is deemed much stricter.

However, in May 2021, France became the first major European country to give approval to Binance to establish its cryptocurrency exchange business in the country. In May 2019, the French government had amended the country’s PACTE Act, introducing specific regulations for digital asset service providers and initial coin offerings.

Germany has no specific regulatory framework for the cryptocurrency industry. However, existing general financial regulations in the capital market and banking sectors as well as AML laws are being extended to digital currencies and tokens.

Although the United Kingdom has exited the EU, as a major European country, it will be a major influence on Europe’s cryptocurrency industry.

The UK has no specific laws on cryptocurrency. However, following the launch of a consultation on crypto assets and stablecoins in 2021, the UK Government in April this year announced a series of measures it will take to make the country a global hub for crypto asset technology and investment.

These measures, among others, include legislating on stablecoins so as to introduce them into the country’s payments framework. The UK also plans to consult on wider regulation of the crypto asset sector later this year.

These developments show that crypto regulation in Europe, as obtainable in other parts of the world, is at the initial stages with lots of room for flexibility.

"The landscape is currently fragmented. There is very real competition across the EU to attract the most talent and startups to their member states,” said Benjamin Whitby, the Head of Regulatory Affairs at Qredo, a network of digital asset custodians tools for financial institutions.

“This is very encouraging for crypto overall but could lead to the pendulum swinging too far and lax controls,” Whitby added.

Headaches for MiCA

Speaking further to Finance Magnates, Whitby noted that while MiCA is “a very ambitious and broad framework”, time is a disadvantage as EU’s coordinated efforts “takes a long time to land.”

“My opinion is that smaller bite size pieces should have been attempted to harmonize key risk areas,” Whitby said.

“DeFi is so far out of the regulators' skill set they should not even attempt to regulate at this time. The recent blow ups have been in the centralized finance (CeFi) space, and the UK is taking advantage of Brexit and racing ahead to enable stablecoins,” the crypto regulation expert added.

One thing MiCA has to achieve is finding the right balance between being innovation-inducing or stifling.

“The key test will be whether the proposals remain proportionate or develop characteristics of regulatory overreach, exceeding the level of issuer-operator approval and scrutiny applied to their legacy equivalents,” Howard noted.

The Opis Group marketing director pointed out that while MiCA “will weed out the weakest projects at a stroke,” it will provide certainty to consumers.

On top of that, the blockchain expert wondered how some provisions of the regulation will be applied retrospectively once passed, adding that MiCA “remains thin on specifics around how compliance and enforcement will take place.”

“While it’s too early, ahead of its concrete implementation, to assert weaknesses in the proposals, there are ambiguities, particularly in terms of how the regulations will be retrospectively applied to reputable, long-standing projects that did not, for example, publish a white paper at the project’s inception,” Howard explained.

MiCA: Europe’s Rocket to the Crypto Promised Land?

The 2022 Global State of Crypto Report by Gemini shows that compared to other regions of the world, a lesser number of people in Europe think cryptocurrency is the future of money.

According to the report, a significant number of respondents from the region agreed that the tax complexities of owning cryptocurrency have kept them from investing in digital assets.

Will MiCA be able to change this state of things in Europe? Can regulation take Europe to the crypto-promised land?

“I doubt the EU will become the crypto promised land but MiCA will resolve the uncertainty regarding offering services to EU citizens and operations of crypto asset service providers in the EU,” Quadrata’s Blockinger told Finance Magnates “No, the EU process is too slow,” Whitby said.

Also commenting, Howard noted that the "talk of a ‘crypto promised land’ is what has led to the wholly unregulated explosion in blockchain-based digital currencies and services, many of which have turned to dust.”

As the world awaits a united regulatory front from authorities in the United States following President Joe Biden’s executive order issued in March, the question of how Europe’s EU-wide crypto regulatory landscape will shape out can only be answered in time.