MiCA: EU’s Pursuit Of Digital Asset Regulation

By Laxmikant Khanvilkar

Amid the swift development of the digital finance era, the European Union (EU) has set a precedent with the adoption of the Markets in Crypto Assets Regulation (MiCA). Marking a milestone in the global financial arena, MiCA aspires to bring regulation to the often-disordered world of cryptocurrencies and digital assets. 

The European Union (EU), a political and economic union of 27 member states collectively representing nearly one-fifth of the global economy, has become the first jurisdiction in the world to introduce Markets in Crypto Assets regulation (MiCA, usually pronounced mee-kuh), a comprehensive, tailored set of rules for the sector this year.

MiCA’s arrival was announced by France’s Finance Minister Bruno Le Maire, who termed the move a “landmark” decision that “will put an end to the crypto Wild West.”.

Several business leaders applauded the choice, stating that the supervision will assist in addressing important issues and removing the regulation change. Changpeng “CZ” Zhao, the CEO of Binance, praised the cryptocurrency exchanges’ “clear rules of the game.”

In their effort to attract investment, the EU has introduced new measures to facilitate legal certainty for virtual digital assets (VDA) businesses.

Let’s understand the constituents of MiCA, the issues governing it, and the way forward.

MiCA’s very existence is based on current EU rules for securities trading, and, hence, compliance with such tough rules will be a challenging task. A company seeking to provide crypto services within the region—whether that’s custody, trading, portfolio management, or advice—will need to be authorized by one of the EU’s 27 national financial regulators. Further, the company is required to publish a white paper giving a fair idea of the risk involved and without misleading potential buyers.

MiCA works to create regulations that allow cutting-edge tools to be used for investing, making payments, and other purposes. There isn’t any attempt to incorporate cryptocurrency into the current securities market laws. Like the controls imposed on traditional finance, the framework has measures to prevent insider trading and market abuse. The EU member states might compete to draw in cryptocurrency commerce by acting more deftly with the support of regulatory monitoring.

Addressing Stablecoins

MiCA has emphasized extensively regulating stablecoins. Since these coins are tied to the value of other assets, the lawmakers have taken into consideration the perceived risks of the meta-backed Libra currency, later renamed Diem, and witnessed the realization of their worries as the terraUSD stablecoin crashed in 2022.

Stablecoins, often referred to as “asset-referenced tokens” (ARTs) in the absence of a fiat currency relationship or “e-money tokens” (EMTs) in the case of one, are required to maintain adequate reserves and adhere to sound governance practices.

Incentives for European VDA industry

Several areas of concern were deliberated upon and given top priority in addressing their importance while arriving at regulatory consensus.

The EU industry remains supportive of MiCA; however, the cost involved in meeting the standards is very high. Those who fail to comply with MiCA norms face penalties as high as 12.5% of their annual turnover. Licensed cryptocurrency providers receive a “passport” that allows them to conduct business with 450 million individuals in return.

MiCA was originally proposed in 2019 by the EU watchdog following the flurry of initial coin offerings (ICOs) that triggered fears of fraud and manipulation. Although the government deliberated on these issues, MiCA is still evolving and is set to change for the better in the coming years.

Meanwhile, the lawmakers favored curbs on energy-intensive proof-of-work technology earlier; however, the final draft dropped such measures, though it mandates the crypto firms to disclose environmental impacts.

However, there are still issues with the final agreement. Some are concerned that restrictions on stablecoins denominated in dollars would put an end to certain decentralized finance initiatives.

It’s yet unclear if this also applies to non-fungible tokens (NFTs), and regulators might need to examine each token in detail to determine whether it’s unique or interchangeable.

Furthermore, it’s unclear if the EU will be able to successfully enforce its regulations on foreign cryptocurrency companies.

Stablecoin limits and environmental disclosures are only two examples of the many elements that will need to be filled in by the European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA), two EU institutions. On a few of those subjects, they have already begun offering consultations; others will follow.

Global Influence

MiCA could have an impact outside of the EU. The “Brussels effect” is one explanation: multinational corporations frequently operate under a common set of norms, which causes innovative EU laws in domains like online data protection to swiftly become the norm throughout the world.

Foreign legislators could be motivated by the bloc’s crypto example. A bipartisan group of U.S. Congress workers even traveled to Brussels in early 2023 to pick up some regulatory insider knowledge. In order to stay competitive, legislators and lobbyists in nations like the U.K. and the U.S. have contended that the EU’s well-defined legal framework may draw in companies.

Because it does not want cryptocurrency havens to undercut it, the EU will support them. Mairead McGuinness of the European Commission has stated that if the rest of the world doesn’t follow suit, there is “no point” for the EU to try to govern a global industry.

When setting standards, international organizations such as the Financial Stability Board appear to be affected by and generally compatible with MiCA when setting standards.

Future of VDA Regulation

The stablecoin requirements of MiCA go into effect in June, six months ahead of schedule, as intended to allow industry and regulators time to get ready. MiCA becomes effective on December 30, 2024. However, MiCA won’t have the last say.

The cryptocurrency industry is also impacted by other EU legislation that addresses topics including cybersecurity, bank capital, money laundering, tax evasion, and distributed ledger technology-based securities trading. The regulatory categories that MiCA establishes may also serve as a model for future legislation.

The commission will report by the middle of 2025 on whether more legislation is required to support NFTs and decentralized finance, and Christine Lagarde, the head of the European Central Bank, has already advocated for a follow-up to address staking and lending for cryptocurrencies.

Some contend that the current market turbulence highlights the necessity for stricter regulations. They have demanded that the customized MiCA method be completely abandoned in favor of a strategy that is more closely based on conventional securities.

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