The European Union is breaking new ground as its first-of-its-kind crypto regulation standards take effect across the entire region. Markets in Crypto-Assets, or MiCA, represents a significant step in establishing a regulatory framework for crypto assets in the EU.
This set of comprehensive measures aims to create a consistent framework regulating crypto and digital assets while protecting investors. One of MiCA’s goals is to enhance financial stability in the crypto market.
The rules may sway other developed markets to follow suit with more comprehensive regulations of their own.
What is MiCA, the Markets in Crypto-Assets regulation?
The European Parliament approved MiCA in 2023 after the collapse of FTX and its $8 billion fraud — but the new rules may be even more needed now. After all, they are designed to ensure a stable crypto marketplace and protect investors.
Crypto companies and exchanges are leaning in for more regulation in the wake of the FTX fraud as a form of legitimacy and a way to rebuild trust with investors, Mardi MacGregor, a partner at Fox Williams LLP, told Converge in a recent podcast.
She added, “I think transparency and regulatory compliance are really crucial when it comes to rebuilding trust in the crypto industry.”
That is the point behind the EU’s framework, which takes effect in two stages during 2024.
In June, it will cover stablecoin issuers, asset-referenced tokens and e-money tokens as part of the assets regulated under MiCA. In December, it will include other crypto asset service providers, highlighting their critical role in the regulatory framework established by MiCA.
New protections for crypto asset service providers to build trust in digital assets
MiCA applies to crypto assets not already covered under EU regulations. The measure will not regulate Bitcoin and other tokens without issuers.
Crypto asset services, including trading platforms, will be required to warn consumers about the risks, costs and charges that stem from trading these digital assets. Many of these services rely on distributed ledger technology, which underpins the operation of crypto assets and is a key focus of MiCA regulation.
Protections are also included to prevent market manipulation and financial crimes, including money laundering, terrorist financing and other criminal activities. The European Securities and Markets Authority (ESMA) has been required “to set up a public register for non-compliant crypto assets service providers that operate in the European Union without authorization.”
Additionally, the new rules require “significant” crypto-currency service providers to disclose their energy consumption as the EU seeks to track and reduce the sector’s high carbon footprint.
How will MiCA work in the European Union?
The MiCA regulations require firms to register with the EU when issuing, trading, providing custody or otherwise handling crypto-assets in the 27-nation common market.
The nascent rules also make it easier to trace transactions. To provide crypto asset services under MiCA, entities will need to register and meet specific regulatory requirements, highlighting the importance of compliance in the evolving digital asset landscape.
MiCA will not include non-fungible tokens (NFTs), but the framework will cover digital wallet transactions exceeding 1,000 euros between a person’s crypto-asset wallet and a service provider. Person-to-person transfers or providers trading with each other will not be subject to the new rules, at least not initially.
Electronic money institutions, among other entities like CRR credit institutions and MiFID investment firms, can provide crypto asset services under MiCA, which complements existing financial services legislation by covering crypto assets not previously regulated.
Stablecoins will also be covered under MiCA. The blockchain-based token can be tied to hard currencies on a one-for-one ratio redeemable by an issuer, who typically holds reserve assets in cash or investment-grade securities.
MiCA requires stablecoins to maintain sizeable reserves to meet potential redemption requests (i.e., a virtual run on the digital currency). It also places trading limits on the largest stablecoins with stricter controls on those not denominated in euros.
MiCA, compliance and the future of the crypto regulatory framework
There are, of course, financial penalties that can reach into the tens of millions of euros for persons or entities found in non-compliance.
The European Banking Authority plays a crucial role in overseeing compliance with MiCA, particularly in relation to asset-referenced tokens and e-money tokens, ensuring that issuers adhere to the regulatory framework.
Cost savings are a major benefit from the uniform regulations in the EU. Crypto experts note that the patchwork laws in markets such as the UK and US create a higher barrier for entry, and operation, for crypto firms to be in compliance.
MiCA differentiates between crypto assets and traditional financial instruments, excluding certain assets from its scope if they qualify as “financial instruments” under the updated Markets in Financial Instruments Directive (MiFID II), thereby streamlining the regulatory process for crypto assets.
If these other markets are prompted to upgrade and consolidate their laws and governance requirements, perhaps following MiCA’s lead and adhering to the same standards, that could save money and headaches for many in the crypto space.
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