In April 2023, the European Union (EU) adopted the first globally recognized regulatory framework for cryptocurrency: the Markets in Cryptoassets (MiCA) Regulation. This article provides an in-depth analysis of MiCA's implications for crypto-asset service providers and issuers, examining the legislation's potential to influence the broader crypto landscape. Here's what the article covers:
What does regulation look like for NFTs and security tokens?
Groundbreaking regulation for crypto
April 2023 brought a turning point for the global crypto industry, with the EU's Markets in Cryptoassets (MiCA) Regulation. The new directives will govern cryptocurrency companies and the services they provide to users across all European Union states. MiCA became the first and only legislation of its kind in the world, and other nations are close to introducing crypto regulation of their own.
|“MiCA deserves to be celebrated as a breakthrough moment for crypto and a catalyst for wider global regulatory standards.”
Few other topics in the industry have attracted such intense scrutiny as regulation. For years, crypto players, policymakers, and legal experts have grappled with plans towards a well-regulated ecosystem. Will this debate now end? That’s unlikely, but MiCA deserves to be celebrated as a breakthrough moment for crypto and a catalyst for wider global regulatory standards.
In this article, we take a close look at the origins of MiCA and its scope of governance, what it means for the crypto space at large, and what comes next.
What is MiCA?
MiCA regulates the activities of two types of organizations across all EU countries: crypto asset service providers and crypto asset issuers. Because MiCA provides a consistent regulatory framework across all EU nations, there’s no need for local implementation laws.
MiCA is not considered to be a stand-alone regulation, and instead supports other initiatives:
- The Digital Operational Resilience Act (DORA) sets rules for stronger digital security among financial services companies. DORA also addresses gaps or inconsistencies in the legal acts that governed companies in the past.
- The DLT Pilot Regime allows companies to use distributed ledger technology (DLT) without the restrictions placed by current legislation. As part of the scheme, companies can apply for exemption from specific requirements under the Markets in Financial Instruments Regulation (MiFIR), Markets in Financial Instruments Directive II (MiFID II), and Central Securities Depositories Regulation (CSDR).
- The Transfer of Funds Regulation (TFR) aims to tackle money laundering and terrorist financing by requiring payment services providers to share information on its payers and payees. This transparency allows for transactions to be suspended or rejected if certain information is missing, incomplete, or incorrect.
The early draft law of MiCA was formally adopted on April 20, 2023, and will come into force sometime between mid-2024 and early 2025.
MiCA has four main objectives:
- Protect consumers and the integrity of the financial markets.
- Maintain the stability of the crypto market.
- Set a consistent legal framework for crypto assets in the scope of MiCA across the EU.
- Support innovation in crypto.
What’s required of crypto asset service providers?
Under MiCA, providers of crypto-asset services, such as trading platforms, exchanges, and wallets, will need to be authorized to operate in the EU. Once authorized, they’ll be subject to new rules related to guaranteeing liquidity of assets and corporate governance broadly.
What’s required of crypto asset issuers?
Issuers of crypto-assets must meet strict obligations and gain authorization if they are to operate in the EU. The obligations of crypto asset issuers are:
- Publish a whitepaper outlining the project.
- Build a liquidity reserve with a ratio of 1:1.
- Meet specific operational requirements described in the regulatory text.
The scope of MiCA
Importantly, MiCA doesn’t regulate every classification of crypto-asset, and only provides a regulatory framework for assets that use decentralized ledger technology (DLT). As a result, non-fungible tokens (NFTs) and security tokens that are defined as financial instruments by the Markets in Financial Instruments Directive and Regulation (MiFID) are not in the scope of MiCA.
Three types of crypto-assets are covered by MiCA through its regulation of crypto asset issuers:
Electronic money tokens (EMT)
EMTs are tokens that get their value from being pegged to a single bank-issued fiat currency. The ‘peg’ is determined as the exchange rate between the two currencies. Once pegged, the movement of the cryptocurrency is meant to fluctuate at the same rate as the fiat currency. The peg is intended to increase EMTs' price stability – but history has shown this stability is never guaranteed.
Asset referenced tokens (ART)
ARTs are defined as tradeable tokens with a value that can be pegged to multiple assets. These assets could be fiat currencies, physical assets, cryptocurrencies, or some combination of the three. ARTs differ from EMTs because they can be pegged to multiple different assets, rather than a single fiat currency. An example is Tether Gold (XAUT), which is backed by gold as a physical asset. ARTs include all crypto assets that aren’t classed as “electronic money tokens”.
Cryptocurrencies not classified as EMTs or ARTs
Also regulated by MiCA are tokens and coins that have utility and are not classed as an EMT or ART. This includes assets that give access to a platform or enable platforms to achieve their intended purpose. One example is XRP, the token used by blockchain-based digital payment network Ripple to settle transactions.
|“PACTE set the precedence for a regulatory framework for crypto assets that both protected users and encouraged innovation.”
Where did MiCA come from?
MiCA has its roots in the PACTE law, which came into force in France in 2019. PACTE is an acronym of plan d'action pour la croissance et la transformation des entreprises, which translates to ‘action plan for business growth and transformation’.
As part of this action plan, PACTE regulates digital asset service providers, provides clarity on the legal status of cryptocurrencies in France, and grants approval for initial coin offerings (ICO). The license available to digital asset service providers – which is optional, not obligatory — covers custody of digital assets for third parties, the purchase or sale of digital assets against legal tender or other digital assets, and operating a trading platform. In other words, PACTE set the precedence for a regulatory framework for crypto assets that both protected users and encouraged innovation — two fundamental pillars of MiCA.
What does MiCA mean for the crypto space?
MiCA marks the biggest step forward for crypto regulation in the industry’s history. It creates clear, enforceable, and legally binding guidelines to govern crypto companies across the world’s largest single market. But beyond the direct benefits of MiCA’s enforcement is the potential for an indirect ripple effect of positive change across the global crypto ecosystem.
For countries yet to take the first steps towards crypto regulation, MiCA provides a blueprint to be localized and adapted if appetite exists to embrace digital assets. It demonstrates that collaboration between industry and government is possible to arrive at a legal framework that satisfies all parties. Meanwhile, MiCA underlines the reality for the technology today: security doesn’t need to come at the cost of innovation.
On the contrary, MiCA and local equivalents can empower crypto industry players with greater confidence to grow and innovate within clear guidelines. Technology and regulation can be complementary forces: where technology empowers, regulation protects. With transparent rules for the operation of digital asset platforms, regulators can encourage industry growth while protecting users.
Momentum is building behind crypto regulation, and other nations look set to soon follow the EU in adopting formal crypto laws. The United Kingdom has publicly stated its ambition to be a global hub for crypto asset technology and announced plans in February 2023 to regulate its budding industry. Meanwhile, in early 2023, Dubai’s Virtual Asset Regulatory Authority (VARA) released new guidelines for the trading of virtual assets in the emirate, and to clarify the responsibilities of market players. The Australian government has also stated plans to introduce legislation to improve regulatory frameworks in crypto during 2023.
As more nations cement their crypto regulations and, as a result, build a stronger and healthier industry, other countries may feel the pressure to follow. If not, they risk falling behind in the race to develop an industry that’s quickly rewriting society’s established systems.
The questions that need answers
Although MiCA represents a major step forward for crypto regulation, questions and uncertainties remain. Finding answers can help accelerate the adoption of greater governance for crypto worldwide.
How do we balance regulation and decentralization?
Many will see regulation from an intermediary as being in direct conflict with crypto’s core value of decentralization. If cryptocurrency was born to exchange digital assets of value remotely and peer-to-peer without the involvement of the established financial system, does government-backed regulation not undermine this original vision? Currently, MiCA excludes the decentralized finance space from its regulations, but this could change in the near future.
Presently, regulation is generally seen by established industry players as a positive influence – possibly because many of today’s leading exchanges are centralized. However, uncertainty remains around how regulation could impact the viability of decentralized platforms. Setting up a decentralized autonomous organization (DAO) to govern decentralized platforms could be one option, but even DAOs usually require some form of legal registration for ownership and control.
What does regulation look like for NFTs and security tokens?
MiCA excludes NFTs and security tokens from its governance, and the reason likely lies with the word ‘security’. It’s important to note here that some NFTs can be considered a security when they’re traded with the expectation of profit. The question of how to regulate securities — and in fact whether all crypto assets can be considered securities — is still up for debate. This uncertainty has stalled progress on how these assets should be governed, and even which government entities this responsibility rests with. The case of America’s Securities and Exchange Commission suing Ripple for allegedly failing to register its XRP token as a security in one such example.
How do we classify crypto assets?
One of the most fundamental challenges holding back progress towards crypto regulation hinges on asset classification — or the lack thereof. For example, despite healthy debate, regulation agencies have yet to define which assets are classed as securities, and whether they should be regulated as such.
The nascent and innovative nature of crypto means that new types of assets emerge often, reopening the same discussions around classification and, consequently, the nature of regulation. Before regulation is to be drawn up and enforced, does the crypto industry first need concrete classifications of assets? Crypto industry players can have a proactive role here, explaining to regulators their technological advancements to arrive at an agreed classification for assets.
How can regulation be enforced across borders?
When it comes to enforcing regulation, the waters are muddied by the crypto industry’s globalized nature. Many platforms operate internationally, raising the question of which national regulation applies, when, and how.
Should platforms be regulated based on the location of their headquarters? If so, how can they operate in multiple markets and remain compliant? And, how can users be granted the same protection when they’re scattered across different jurisdictions? Globally consistent regulation is near impossible to achieve, but agreed protocol on how to apply country-specific regulation is the next best thing.
The final word
The adoption of MiCA in the EU is as important to our industry as a new technological breakthrough. Crypto’s regulation is inevitable, and without it, progress for the space is held back as legal debates consume resources and operational restrictions hamper adoption. MiCA is an example of healthy governance for our space, where a balance exists between protecting users without limiting innovation.
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