MiCA regulation, Markets in Crypto-Assets regulation, is coming to Europe, with a new framework of EU-wide crypto rules that have been approved by the European Commission. The new system is not expected to come into force until 2024, but the EU aims to close the regulatory gap that exists between the crypto industry and existing financial services.
It is notable that this will not be done through shoehorning crypto into current categorizations, but with a novel set of rules, which implies a genuine recognition of both crypto’s importance, and the necessity to adapt to new technologies.
Although the process of bringing in MiCA was initiated long before the collapse of FTX (producing continent-wide legislation is a lengthy endeavor), events at FTX reinforced the position of those calling for clear regulatory rails and stronger consumer protections.
What Will MiCA Cover?
The MiCA definition of a crypto asset is, “a digital representation of a value or a right which may be transferred and stored electronically, using distributed ledger technology or similar technology.” This is then broken down into three categories: asset-referenced tokens (ARTs), electronic money tokens (EMTs), and then a catch-all group containing other crypto assets.
ARTs and EMTs are similar, and could both be referred to, more casually, as stablecoins. The distinction between the two is that EMTs are pegged one-to-one to a fiat currency, while ARTs can be backed by a combination of assets, including fiat, crypto and other assets, but not simply by one fiat currency.
Among the central points covered by MiCA are requirements that stablecoins are sufficiently backed, capital requirements for issuers, and issuance limits, with an overall emphasis on transparency. It appears, though, that technicalities and details will be open to revision as MiCA plays out in the real environment, with the EU strategy having inevitably imperfect regulations in place that can then be modified and improved upon as required.
MiCA is heavily focused on stablecoins and CASPs (Customer Asset Service Providers, such as centralized exchanges and market makers), but one issue MiCA doesn’t deal with directly is self-custody, meaning the capacity for crypto users to hold their own funds in their own wallets. However, this is covered by the Transfer of Funds Regulation (TFR), which links up with MiCA.
Here, we have some strangely mixed standards, in which peer-to-peer transactions are unaffected, a CASP to another CASP must follow TFR regulations, a CASP to its own customer must verify its customer, while a CASP to a non-customer wallet or to a non-EU CASP has a lower standard of verification to adhere to, based on perceived risk, all of which seems incoherent piecemeal.
However, an outright ban on self-custody, as was, temporarily proposed by some parties, is not happening. This is critical since self-custody is a fundamental tenet of cryptocurrency and web3.
Furthermore, MiCA doesn’t cover all aspects of web3. NFTs, aside from if they are fractionalized, remain untouched, due to the range of utilities they can possess (from a digital medium for art and collectibles to ticketing and membership passes), and DeFi also remains, for the time being, outside MiCA’s remit, perhaps due to its unique complexity.
Positioning for Web3
Speaking on the Bankless channel, Seth Hertlein, the Global Head of Policy at Ledger, described: “This sense in Europe, particularly among policymakers, that Europe lost web2, that all the web2 giants were first American and then, increasingly, Chinese.”
In addition, he refers to Europe having been spurred into action when, back in 2019, Facebook announced plans to create Libra, a dollar-pegged stablecoin that, in the end, was never completed. It seems the EU identified a need to move fast in order not to be caught unprepared or lose ground when it came to crypto. MiCA grew and expanded from there, and is intended to provide regulatory certainty in a single package, in order to clear a defined path forward.
In contrast, US regulators have been accused of lacking clarity and wielding ill-fitting rules from traditional finance in a hostile manner, causing acrimony in the web3 space. However, it was reported last month that the US was sending a team of Congressional staffers to Brussels and Paris where they would be meeting with EU officials and crypto industry lobbyists to learn about MiCA.
It appears, then, that through its crypto policies, the EU may be setting, or attempting to set, a regulatory precedent for the world as, for better or worse, there will soon be a comprehensive crypto framework covering the world’s largest single market area.
An Example to Follow?
Is it likely that while other nations delay in providing crypto rules about their own MiCA, as the first system that is up and operational, influences regulatory development around the world? It’s a plausible scenario, and in that case, what happens from here in Europe may provide indicators as to what will be implemented later in the US and other regions.
On the other hand, it’s worth keeping in mind that regulatory battles in the EU don’t end when MiCA starts, meaning that proposals for further EU regulation are already lining up. And, while a complete package of regulation may appear to provide a path forward for industry players, the counter-position is that over-regulation stifles innovation, placing obstacles in what previously was open ground.
What’s more, when it comes to the establishment of global tech companies, the US has markedly outperformed the EU, calling into question the benefits of emulating the EU approach. While there is no doubt that MiCA and its impacts are of strong interest globally, there are compelling arguments that other regions may benefit competitively from not rushing to place restrictions on a still-emerging field of tech development.
