MiCA Regulation: What, When, Why?

As the value of tokens rise and fall, some traders look for a safe digital haven. This desire might manifest thanks to a legislative package passed by the EU.

Known as MiCA, we explore the following: What do traders need to know? How might this legislation impact the crypto markets? Why were there so many delays and when will the regulations come into effect?

Let’s take some time to sort through the fluff in order to get down to the heart of the matter.

What Exactly is MiCA?

MiCA is an abbreviation for “Markets in Crypto Assets“. This landmark legislation is meant to serve a handful of understandably practical purposes such as (1):

• To provide greater marketplace stability
• To protect the average investor
• To encourage industry-wide innovation and to attract new traders

To be honest, these proposals actually make a great deal of sense when we take 2022’s FTX fallout into account as well as the bullish conditions that began at the turn of 2023. There’s still a bit more than initially meets the eye, so it pays to delve deeper into this framework.

The laws were finally passed on the 20th April 2023 after several delays, with 517 votes in favor and 38 against, with 18 abstentions. Some of the rules around stablecoins are due to come into effect in July 2024 , and the rest will be fully implemented across all 27 member states within two years, with January 2025 being floated as a possible deadline date.

Who’s Behind this Legislation?

So, how did this legislation come about? You might be interested to learn that it was first introduced as far back as September 2020 (well before the downfall of FTX and the subsequent market-wide volatility). As with many EU laws, the ‘fine print’ still needed to be clarified. This resulted in several delays until a vote of 28-1 in favor was ratified in October 2022. However, that was only the first stage, and it would take until April the following year to be passed in a final voting round.

We’ll also highlight the fact that this framework was not the result of the haggling between central banks or larger financial institutions that wanted to wanted to obtain a bigger slice of the proverbial pie. It was instead enacted by the Economic and Monetary Affairs Committee of the European Commission (EC). So, all members of the commission were entitled to an equal vote.

After the passing of the vote, Stefan Berger – who is the minister most responsible for drafting the legislation – stated that Europe is the “first continent with comprehensive regulation for crypto assets” and that “the new supervisory structures will also be a bulwark against Lehman Brothers moments like the crypto exchange FTX.”

What Crypto Assets Will MiCA Address?

Now that we’ve obtained a basic overview of this new proposal, it is only logical to take a closer look at what assets will be impacted. From a simplified viewpoint, it is intended to cover sectors that are not currently governed by any type of existing legislation. These categories include:

• Utility tokens
• Asset-referenced tokens (ARTs)
• Electronic money tokens (EMTs)

Now, some savvy traders might still be asking why such regulations would be necessary considering that the MiFID (Markets in Financial Instruments) II is already in place. The main point here is that the existing MiFID legislation was not really designed to oversee crypto transactions.

For example, some EU states might classify crypto assets as “transferrable securities” while others could prefer to define them as “financial instruments”. The problem here is that the hybrid nature of many crypto tokens can be interpreted in either way. This could lead to confusion in terms of which laws apply. MiCA has been designed to provide a bit of much-needed clarity to traders and institutions alike.

How Might this Framework Impact the Crypto Markets?

Once fully enacted, crypto firms will be provided with an additional 18 months in order to adapt to the new digital ecosystem. So, there’s certainly no reason to think that the crypto world will be turned on its head anytime soon.

There are nonetheless a few important knock-on effects that will come to pass. Some of the “nuts and bolts” contained within this legislation include:

• Establishing an EU-wide definition of market terms such as crypto assets, ARTs and e-money tokens (EMTs).
• Determining which ARTs and EMTs are considered “significant” assets (based on parameters such as the total market cap and the number of transactions per day).
• Creating national competent authorities (NCAs) that will oversee the regulations themselves on a country-by-country basis.
• Ensuring transparency and preventing market abuse.

The bottom line is that the main intention is to provide the EU with a centralized set of rules that will be interpreted the same by every member state. This should provide the markets with a greater sense of stability. Let’s also remember that traders who are confident that they’re adequately protected will be much more likely to become involved; good news in light of recent times.

The EU will also ask crypto companies to report the environmental impact of their activities, in a compromise measure after a total ban on proof of work was taken out of an earlier draft.

New Rules for Crypto Licensing and Fund Transfers

One of the key provisions of the MiCA regulation is the requirement for crypto businesses to obtain a license in order to operate in the EU. The license will be issued by national regulators, and it will be valid throughout the bloc. This will create a level playing field for crypto businesses, and it will ensure that they’re subject to the same rules and standards.

In addition to the licensing requirement, the legislation also includes new rules for fund transfers. Crypto businesses will be required to adhere to strict anti-money laundering (AML) and counter-terrorist financing (CTF) regulations, and they’ll be required to implement – in cases where it’s not already so – strong customer verification procedures.

The goal of these new rules is to prevent crypto assets from being used for illicit purposes. By requiring crypto businesses to implement these changes, the the regulation will supposedly help to protect the integrity of the financial system. Some of the ‘crypto utopians’ see much of this as heavy handed, and against the libertarian ethos that underpinned the inital concept of crypto.

Why the Delay?

What we have seen so far makes a great deal of sense. This brings up yet another practical question. Why did we have to wait until April 2023? Were individual companies arguing over specific points? Was there pressure to make concessions from larger financial institutions? Not really.

Believe it or not, the main sticking point instead involved how to accurately translate the text itself into no fewer than 24 languages. This certainly isn’t the first time that such stumbling blocks have occurred and as the expression goes, it’s better to be safe than sorry in terms of dotting the “i’s” and crossing the “t’s”.

Are There Any Possible Shortcomings?

On the one hand, it will provide legal certainty and protection for investors, which will help to promote the growth of the industry. On the other hand, it will impose new regulatory requirements on crypto businesses, which could increase their costs and limit their ability to innovate.

MiCA regulations are ultimately intended to provide the EU crypto markets with a greater degree of stability and transparency. In turn, this should help to actively promote large-scale investing. There are still some issues that might need to be ironed out in the future.

One complaint involves what types of assets this framework covers. Some feel that it will not be able to tackle new concepts such as the metaverse and how crypto-related data can be protected. However, a larger problem involves global compliance. The European Union isn’t an island. Crypto markets have become universal in nature. So, the benefits outlined above will serve little purpose unless other regions take similar steps.

And, of course there are the reactions from libertarian crypto maximalists who believe government regulation – no matter how large or small in scale – is inherently a negative, and goes against the core principles of Satoshi Nakamoto and others.

Some will point to Berger’s pronouncement that “for new coins to be approved in the EU, it must be ensured in future that their business model will not endanger our currency stability” as a sign of potential future CBDC authoritarianism.

Will MiCA rules effect the UK?

As of April 2023, the MiCA regulation is a regulatory framework developed by the European Union to govern the use of crypto assets within the EU. So, it will not directly apply to countries outside of the EU, such as the UK, Norway, and Switzerland. Though this could change going forward, of course, particularly one suspects for the latter two given their closer ties to the bloc following Brexit.

The United Kingdom government has released draft proposals for regulating crypto assets, as part of its plan to create a regulatory framework for the cryptocurrency industry. The proposals would require firms in the sector to obtain authorization from the Financial Conduct Authority (FCA) and adhere to a set of standards and principles designed to “protect investors and prevent financial crime.” So, not too dissimilar to MiCA then.

The proposals also include provisions for safeguarding customer funds and for resolving disputes between firms and their customers. And, also like the EU’s set of regulations, to promote innovation and competition within the industry by creating a level playing field for all firms.

We’ll update this section once further information is available regarding the progress of the UK’s proposed regulations.

Comparison with US Securities Law

While the EU has developed the MiCA regulation to govern the use of crypto assets, the United States has taken a different approach. Instead of creating a new regulatory framework for crypto, the US has applied existing securities laws to the industry.

This has led to some confusion and uncertainty in the space on that side of the Atlantic. Many crypto businesses are unsure how to comply with securities laws, and there is ongoing debate over whether certain crypto-assets should be considered securities. Ethereum perhaps being the most pressing example.

Despite these challenges, the US crypto industry continues to grow and innovate. While MiCA is likely to have a significant impact on the EU crypto industry, it remains to be seen how it will compare to the US approach in the long run.

A Sign of the Times

We’re all aware that the crypto markets could benefit from a bit of stability. This latest bundle of regulations intends to address many of the issues that have spooked certain investors for some time. While there are likely to be challenges and uncertainties in the short term, many experts believe that these regulations are a positive development for the industry, and that they will help to promote innovation and competition in the long run.

It’ll still be interesting to see how individual traders react and adapt.

As always, the team at Crypto Lists will keep you informed of the latest MiCA news so that you can remain well ahead of the curve. Be sure to bookmark this page and to check back regularly for additional updates.