MiCA: the EU gets serious about crypto regulation
New regulation is designed to protect consumers, enforce compliance, and track all significant transactions between crypto exchanges and private wallets. It's been broadly well-received by exchanges, in contrast to perceived dithering by the SEC in the US.
On 20th April, the European Parliament overwhelmingly approved the Markets in Crypto-Assets (MiCA) regulation. This is part of the European Commission's multi-pronged approach to regulating digital assets of all kinds. Other related regulations include the DLT [Distributed Ledger Technology] Pilot Regime and the Digital Operational Resilience Act.
What is the MiCA regulation? (summary)
The purpose of the MiCA regulation is to provide clear laws governing crypto-assets, with the stated intention of protecting customers from fraud. Although the majority of crypto exchanges servicing European clients already take sensible steps to do this, from 2024 some specific requirements will become mandatory.
These requirements include the maintenance of ample reserves in case of a 'run' on an exchange, and plenty of information for consumers about the risks of using or trading in crypto-assets. For now, art-related NFTs will be largely excluded from the regulation.
Perhaps the most important aspect of MiCA is an associated regulation that requires crypto exchanges to identify private wallet customers: the Transfer of Funds regulation or so-called "travel rule." Any transfer of more than 1,000 Euros equivalence between an exchange and a private wallet must be recorded and reported.
In theory this undermines two of the original appeals of crypto-assets, especially cryptocurrencies such as Bitcoin: untraceability and anonymity. In practice neither has been entirely true for years, since few crypto-assets are truly anonymous or untraceable.
In any case, decentralised peer-to-peer transfers (i.e. from one private wallet to another) will not be covered by the new regulation, so there's nothing to stop anybody sending cryptocurrencies directly to another person. It's only when an exchange gets involved that the regulation takes effect. Of course, this means that any significant conversion of crypto to or from fiat currencies is likely to be tracked and reported.
The MEP leading the MiCA regulation, Stefan Burger, commented that, "the sector damaged by the FTX collapse can regain trust," although it's not immediately apparent how that directly relates to MiCA, since accounting fraud and false asset statements can be made regardless of customer transaction records: see the history of the recent Credit Suisse collapse, for example.
The regulation also includes legislation to prevent any stablecoin becoming too big to fail, by limiting transaction volumes 'as a medium of exchange' to a quarterly average of 1 million transactions per day and/or a value of 200 million Euros per day. This will also have the effect of preventing such coins becoming too big to compete with the Euro or a CBDC, of course.
In a sense, the MiCA regulation means that crypto exchanges will be regulated in the same way as stock trading platforms. They will be required to identify their customers, to provide suitable warnings about risk, and to report transactions to the financial regulator. They may also be liable for reimbursement of lost client funds in the event of fraud or mismanagement, and they will be responsible for enacting robust anti-money-laundering practices.
On the whole, existing crypto exchanges have greeted the MiCA regulation positively, and the UK seems likely to follow the EU's lead within the next year or so. This is in contrast to the situation in the US, in which the Securities and Exchange Commission apparently still can't decide whether or not crypto-assets are securities, nor how they should be regulated if they are.
It's possible that some existing exchanges may shift their HQs to Europe in 2024 as a result of MiCA coming into force. The CEO of the Coinbase exchange has already hinted that this might be an option. The clear regulatory framework of the EU's MiCA could be more attractive to exchanges than the muddled and incomplete framework that currently exists in the US and other countries.
FAQ: MiCA regulation
Who does MiCA apply to?
MiCA (Markets in Crypto-Assets) applies to various entities involved in the crypto-assets industry operating within the European Union (EU). It covers a wide range of participants, including issuers of crypto-assets, service providers, and custodian wallet providers. MiCA also extends its scope to certain activities related to distributed ledger technology (DLT), such as smart contract providers and trading platforms. The aim of MiCA is to establish a harmonized regulatory framework for crypto-assets throughout the EU, ensuring consumer protection, market integrity, and financial stability within the digital asset market.
Does MiCA apply to NFTs?
Yes, MiCA (Markets in Crypto-Assets) does apply to non-fungible tokens (NFTs) under certain conditions. NFTs are considered a form of crypto-asset, and MiCA aims to regulate various types of crypto-assets within the European Union (EU). As such, NFT issuers and service providers involved in NFT activities may fall within the scope of MiCA's regulations, depending on the specific characteristics and features of the NFTs involved.
Does MiCA regulate DeFi?
Yes, MiCA (Markets in Crypto-Assets) does regulate certain aspects of decentralized finance (DeFi) within the European Union (EU). DeFi platforms and services that fall within the definition of crypto-assets and are considered within the scope of MiCA will be subject to regulatory requirements and obligations. This includes DeFi activities such as trading platforms, decentralized exchanges (DEXs), and lending protocols operating within the EU. MiCA aims to provide a regulatory framework that ensures consumer protection, market integrity, and financial stability in the rapidly evolving DeFi sector.
Will MiCA apply to Bitcoin?
Yes, MiCA (Markets in Crypto-Assets) will apply to Bitcoin within the European Union (EU). As a widely recognized and established cryptocurrency, Bitcoin falls under the definition of a crypto-asset, and MiCA aims to regulate various types of crypto-assets within the EU. This means that issuers, service providers, and other entities involved in Bitcoin-related activities will be subject to regulatory requirements and obligations outlined in MiCA.
What are the categories of crypto-assets in MiCA?
MiCA (Markets in Crypto-Assets) categorizes crypto-assets into three main categories: (1) e-money tokens, (2) asset-referenced tokens, and (3) utility tokens.
E-money tokens: These tokens are designed to serve as a digital representation of fiat currency and are used for making payments. They have the characteristics of electronic money and are issued by a central authority. E-money tokens aim to provide a stable and reliable means of exchange.
Asset-referenced tokens: These tokens are backed by one or more underlying assets, such as commodities, real estate, or other financial instruments. The value of asset-referenced tokens is tied to the value of the underlying asset(s). These tokens can be used for investment purposes or as a means to access the underlying assets.
Utility tokens: These tokens grant access to a product or service provided by the issuer. Utility tokens are primarily used within a specific ecosystem and do not have the characteristics of traditional financial instruments.
These categories help classify different types of crypto-assets and provide a framework for regulation and oversight within the EU. It's worth noting that the categorization and specific requirements may be subject to further updates and refinements.
Does MiCA apply to Switzerland?
No, MiCA (Markets in Crypto-Assets) does not apply to Switzerland. MiCA is a regulatory framework specifically developed by the European Union (EU) to regulate crypto-assets within its member states. Switzerland, as a non-EU country, has its own regulatory framework for cryptocurrencies and digital assets. Switzerland has been known for its favorable approach to cryptocurrency regulation, with its own set of rules and guidelines, such as the Swiss Financial Market Supervisory Authority (FINMA) guidelines. Therefore, any regulations or requirements pertaining to crypto-assets in Switzerland would be separate from MiCA and governed by Swiss laws and regulations.
However, in the case of cross-border issuances, the MiCA Regulation will also be relevant for Swiss issuers, as its scope of application extends to crypto-tokens issued in the EU or services related to crypto-tokens
Read more about MiCA here.
