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MiCA: Shaping the Future of Crypto-Asset Markets

In recent years, the rapid growth of cryptocurrencies and digital assets has captured the attention of regulators worldwide. The evolving nature of these markets has presented both opportunities and challenges, prompting the need for comprehensive regulation. One significant development in this regard is the Markets in Crypto-Assets Regulation (MiCA) proposed by the European Commission. The European commission sees the following drivers, problems and consequences with regard to crypto assets:

What is the Markets in Crypto-Assets Regulation (MiCA)?

MiCA, also known as the Markets in Crypto-Assets Regulation, is a regulatory framework designed by the European Commission to govern crypto asset markets and associated services that are not currently regulated under EU laws. This framework has been in development since 2018 and aims to establish a unified licensing system across all EU member states in order to standardize the regulation of cryptocurrency creation and trading, aligning with the European Digital Finance Strategy.

Where will MiCA be applicable?

Once adopted, MiCA will be applicable in all European Union (EU) member states. It will provide a new legal basis for regulating crypto asset markets within the EU, including crypto assets and service providers that are not currently subject to EU regulations. This will enable the provision of crypto services across the EU without the need for national implementation. The adoption of MiCA will directly impact any company seeking to operate within the EU, even if their clientele is located outside the European Union. This will ensure consistent regulation of crypto asset markets, enhancing security and transparency.

Who is MiCA for and why?

MiCA was developed by the European Commission to regulate crypto assets within the EU and protect consumers from the financial risks associated with unregulated virtual assets. While cryptocurrencies offer potential for innovation and advanced investment products, they also pose risks to investors and markets, including money laundering, terrorist financing, and trading abuse. MiCA is the result of a process initiated in 2018, when Bitcoin experienced a surge in popularity, and public interest in cryptocurrencies reached its peak. In response to the increasing risks associated with unregulated virtual assets, the European Commission tasked the European Banking Authority and the European Securities and Markets Authority with evaluating the adequacy of the existing EU financial services regulatory framework for crypto assets. The evaluation revealed that most crypto assets were not covered by EU financial services legislation and lacked necessary consumer and investor protections, as well as market integrity. As a result, European regulators started working on a new regulatory framework for crypto assets, which eventually became MiCA as part of the digital finance package.

What are the objectives of MiCA?

The proposal for “Crypto-Asset Markets” is built on four primary objectives:

When will the MiCA be enforced?

MiCA implementation timeframe remains unspecified, unlike other EU proposed laws that follow a complex approval process within a defined timeframe. However, the European Union plans to implement the new rules over the course of the next four years. By 2024, the EU aims to establish a comprehensive framework that enables the use of distributed ledger technology (DLT) and crypto assets in the financial sector, taking into account associated risks.

How can the EU crypto-asset industry benefit from MiCA?

The European Commission’s proposal has highlighted concerns regarding the inability of crypto-asset companies to leverage the EU’s internal financial services market. This issue arises due to the lack of a clear legal definition for the regulatory framework of crypto assets and the absence of a consistent regulatory regime at the EU level. Consequently, crypto firms are unable to “passport” their license within the EU, a privilege enjoyed by traditional financial services.
Moreover, most EU member states do not regulate businesses associated with crypto assets, leading to the creation of separate national rules for their regulation. This diversity of rules and definitions poses challenges for these companies, hindering their growth potential at the EU level due to high costs, legal complexities, and regulatory uncertainties. As a result, an uneven competitive landscape for crypto asset companies emerges, depending on the member state, which undermines the efficiency of the internal market. To address this issue and provide a common framework at the EU level for crypto assets and their service providers, the European Union plans to introduce a new regulatory instrument, MiCA.

FiCAS’ Chairman view on MiCA

The EU’s regulatory crypto-asset landscape was until recently characterised by fragmentation and uncertainty. This has hindered the scaling-up and development of crypto-asset products and services. The industry has therefore welcomed the European Commission (EC) initiative, of 24 September 2020, to issue a Digital Finance Package (DFP) that included a proposal for an EU regulatory framework on crypto assets. On 5 October 2022, the European Council approved the final text of the regulation on markets in crypto assets (MiCA). The law should come into force in 2024. The regulation reveals an approach based on the principles of ‘same activity, same risk, same rule’, proportionality and complementarity. The achievement is remarkable, if one think about the dire state of the current regulatory process in the US, for instance. The regulation adds to existing rules for AML and securities tokens and provides entrepreneurs, consumers, and investors in the EU with a regulated environment for crypto assets aimed at seizing related opportunities in a risk-controlled environment. The main criticism to the framework relates to the detailed and far-reaching nature of the proposed requirements vis-à-vis the reality of an industry that is, at best, embryonic. In some sense, the regulation risks at least initially the deterrence— instead of the promotion — of the industry, with entrepreneurs that may feel discouraged by the compliance tasks and related burden. In the longer term, however the industry will benefit from clear, extensive, and stable rules of the game. The scope of the regulation excludes NFTs (provided they are not traded fractionally); these could be treated as securities. It also excludes crypto assets resulting from staking (however, it is not entirely clear if another treatment applies). The regulation also contains extensive requirements concerning risk warning / climate-related impact, and quantitative caps to the issuance of stablecoins.

Further information:

• European Commission: Link

• CoinDesk: Link

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