MiCA: What Europe’s new crypto rules mean for the industry
After more than two and a half years of discussions and tweaks, the EU looks set to pass its landmark crypto regulations.
The comprehensive package of new rules is scheduled for a vote in the week of April 17.
Markets in Crypto Assets (MiCA) is part of a wider package within the EU that aims to update the bloc’s approach on several digital financial fronts. MiCA itself focuses on providers of cryptoassets, and the obligations they will have to declare. It also places great demands on operators of stablecoins.
But the most important thing is that it unifies the approach across all 27 member states.
However, this month’s vote is far from the end of the story.
If members of the European Parliament approve the changes, countries have as long as 18 months to implement them. The actual details of how MiCA will be used will be sorted out by ESMA, the EU’s securities regulator.
Nevertheless, it marks an important milestone not only for crypto in Europe, but around the world.
Companies based in other countries will be affected if they want to offer their services to EU customers, and Finance Commissioner Mairead McGuinness has spoken enthusiastically about sharing ideas with her US counterparts.
“It’s very political,” says Marina Markezic, co-founder and CEO of the European Crypto Initiative, an industry group formed in response to the MiCA proposal. “Brussels thinks that they are coming up with very good standards and ideally they would be exported to other jurisdictions – that’s the Brussels effect.”
Europe Takes on ‘Crypto Asset Service Providers’
MiCA is concerned with establishing rules for a broad category of companies referred to as “crypto asset service providers” or CASPs.
This covers firms that engage in all types of activities, from operating a trading platform and providing custody to marketing new assets and providing crypto advice.
Under MiCA, anyone wishing to publicly offer a crypto-asset must produce a white paper disclosing information about it. This will include information about the issuer or company that wants to take it up for trading, what they want to do with the capital raised, what rights or obligations are attached to the asset, and what technology underlies it.
They also need to be upfront about the possible risks of investing.
In some cases, the CASP responsible for producing this will be the issuer of the asset; but in others it may be the trading platform that offers the asset to customers.
Many in the cryptosphere will be familiar with the concept of a white paper, but Sam Tyfield, an M&A lawyer at UK firm Shoosmiths, says EU rules will require a much tougher, standardized approach.
Drawing on his experience of amending and extending a draft white paper to make it nominally MiCA compliant, Tyfield says that “the amount of information and data required to do this is significantly outside current market practice for white papers and a significant challenge for most potential issuers of cryptoassets or tokens.”
“This is not a bad thing,” he tells Decrypt. “As it may cause some of the more volatile issuers of cryptoassets to withdraw from a project.”
Anne-Sophie Cissey, head of legal and compliance at French market maker Flowdesk, agrees.
Having come from a traditional finance background, she sees it as equal to the strict standards that apply to the issuance of equity capital. “I see how people raise money and just say, ‘Okay, it’s a nice picture, give us money and everything will be fine,’ but don’t have a plan. With MiCA, we have this kind of information.”
One thing she doesn’t want to see, however, is a creeping paternalism. “But what I fear – not even with MiCA, but maybe with MiCA [in practice], or with what they do in the US, they want to protect the investor from themselves, said Cissey. “We are adults and we can make a decision.”
MiCA on stablecoins, NFTs
Another flagship component of MiCA is the tightening of the rules for stablecoins. Under the proposals, issuers must maintain a reserve of assets backing up tokens. They must be separated from their own assets and invested in low-risk ways. The EU legislators also make room for large stablecoin issuers to be subject to stricter rules such as higher capital requirements.
However, these rules will not affect central bank digital currencies (CBDCs), which are exempt. Observers have long noted that MiCA’s genesis, as a response to Facebook’s now defunct Diem (formally called Libra) project, is rooted in fears of a non-state currency making headway in the region.
Wolf-Georg Ringe, director of the Department of Law and Economics at the University of Hamburg, wrote shortly after regulations were first proposed: “Reading between the lines, the proposal shows the fear of losing monetary sovereignty to private actors, and there is no coincidence that the ECB a few days after the Commission’s proposal was published [European Central Bank] launched its initiative for a digital euro.”
A notable exclusion from MiCA is NFTs.
The requirement to prepare a white paper explicitly does not apply to assets that are “unique and non-fungible, including digital art and collectibles.”
However, further clarification in the text raises the possibility that assets issued “in a large series or collection” may be considered fungible. Experts have suggested that this could affect large projects such as Bored Apes Yacht Club (BAYC) and CryptoPunks, whose scale affects their claims of uniqueness.
This is one of the points that will probably be clarified by ESMA’s guidelines.
Other aspects of digital finance have been left out of MiCA as well, but some hope these could be incorporated in future versions or in other legislation.
“A number of technologies have emerged since MiCA was drafted – the most notable being staking,” comments Nick Taylor, head of public policy EMEA at crypto exchange Luno. “Several crypto companies are now looking to incorporate this into their value proposition, following the transition to proof-of-stake mechanisms, and guidelines for its use have not yet been set in MiCA. Future versions of MiCA may also consider DeFi, NFTs and lending.” »
Limitations in the regulation have already been identified by the best European institutions. Last week, a member of the European Central Bank’s advisory board said recent progress on regulation was not enough.
In a blog post, ECB Supervisory Board member Elizabeth McCaul said the likes of Binance and the now-defunct FTX were unlikely to be considered “significant” under MiCA in its current form, and that a company’s entire business would have to be considered, not just the extent of its presence in EU.
“Overwhelmed” by costs to comply
Since MiCA was first proposed, the EU Crypto Initiative has been particularly concerned about how startups will handle the new regulatory burden.
“I think they may not have the financial capacity, the manpower, to comply,” says Markezic. “We’re just going to see some of them basically get overwhelmed by it.”
Flowdesk’s Cissey says her company is “90% of the way there” in preparing for MiCA. But she suspects that any new entrants to the market will look elsewhere when starting up. “If I wanted to start a new project, I would do it in the BVI, the Cayman Islands or the Bahamas,” she said.
Dion Seymour, technical director of crypto and digital assets at tax advisory firm Andersen LLP, says this kind of “regulatory shopping” is likely already happening. “Quite often with some of the smaller firms in particular, as with any small business, the regulations that are put on them can be quite difficult and they need to engage with regulatory lawyers, which are not cheap,” Seymour said.
On the plus side, however, a unified approach will open up opportunities for any company that can handle the new rules.
Once they are authorized in one country, this can be applied across the rest of the Union.
“I would say the best part of MiCA is providing access to the entire EU market,” says Markezic. – Right now we have a very, very different situation in all the member states. Some have some regulations, some have zero, and it’s very difficult to just be compliant there. For larger companies, a unified European approach has a lot to offer.”
Przemyslaw Kral, CEO of the Polish crypto exchange Zonda, has a similarly optimistic position. “While MiCA will undoubtedly present a challenge to some of the smaller crypto startups, I predict the overall effect will be positive,” he says.
“The regulatory clarity and security provided by MiCA are attractive to institutional investors and larger firms, leading to increased investment and growth opportunities in the European crypto market,” says Kral.
