EU Approves MiCA — Unleashing New Era in Digital Asset Regulation
Last Thursday, April 20, the European Union Parliament voted 517 to 38 in favor of a new crypto licensing regime, called Markets in Crypto-Assets (MiCA). This is a major milestone, as the EU is the first major jurisdiction in the world to introduce a comprehensive crypto law. In the words of Stefan Berger, the lawmaker who led negotiations on the MiCA legislation, “the rules put the EU at the forefront of the token economy… The European crypto-asset industry has regulatory clarity that does not exist in countries like the U.S.”
Europe pulls ahead with MiCA
MiCA is designed to bring more oversight to the cryptocurrency market, which has been operating in a largely unregulated manner. The new law will require crypto exchanges and digital wallet companies to get licensed in order to operate in the EU. Licensed companies will be able to offer regulated services and “passport” them across the EU. MiCA also requires stablecoin issuers to hold sufficient reserves.
The MiCA regulation has been in the making since it was first proposed in 2020, and the rules will take effect 12 to 18 months after the legislation is published in the bloc’s Official Journal, which is likely to happen in June. MiCA has been controversial, with some industry players arguing that it will stifle innovation and investment in the sector.
According to a report from Reuters, the EU’s approval of MiCA is part of a larger effort to regulate the digital economy. “Regulating the digital economy is a priority for the EU and today’s adoption of MiCA represents a significant step towards creating a framework that will foster innovation while also ensuring that consumers and investors are protected,” said Derville Rowland, the director general of financial conduct at the Central Bank of Ireland.
In addition to MiCA, the European Parliament also voted 529 to 29 in favor of another law known as the Transfer of Funds regulation. The law requires all crypto operators to identify their customers in order to fight money laundering. This is known as the “travel rule”, which is already used in traditional finance, and will now cover transfers of crypto assets. Information on the source of the asset and its beneficiary will need to “travel” with the transaction and be stored on both sides of the transfer.
The Transfer of Funds regulation will also apply to transactions above €1000 from self-hosted wallets (a crypto-asset wallet address of a private user) when they interact with hosted wallets managed by crypto-assets service providers. The rules will not apply to person-to-person transfers conducted without a provider or among providers acting on their own behalf.
The body of legislation includes measures against market manipulation and against money laundering, terrorist financing, and other criminal activities. To counter money-laundering risks, the European Securities and Markets Authority (ESMA) will set up a public register for non-compliant crypto assets service providers that operate in the European Union without authorization.
Global crypto community voices discontent with MiCA
One of the biggest challenges of these laws is that they create major obstacles in the DeFi world, as current implementations of DeFi protocols and services do not support the identities of the source and destination being part of the transaction end-to-end. DeFi infrastructure and service providers, as well as operators, will have to adjust to EU regulation or avoid the EU market altogether.
While some in the crypto community are concerned about the impact of these new laws on innovation, others believe that clear and comprehensive crypto regulation is long overdue and is critical for the growth of the crypto assets ecosystem. According to a report from CoinDesk, “eliminating anonymity and requiring more accountability from operators on topics like crypto marketing/offering rules and requiring stablecoin issuers to keep ample reserves will allow the industry to re-build some of the trust that got eroded with scandals like Terra-Luna, FTX and Bitfinex.”
Comparing the EU’s MiCA to the US SEC’s approach
It’s clear that the EU is taking a more proactive and comprehensive approach to digital asset regulation. The SEC has been working on a number of initiatives to regulate digital assets, including the recent announcement of a working group focused on DeFi. However, the US still lacks a comprehensive federal regulatory framework for digital assets. Instead, the SEC has been relying on existing laws, such as the Securities Act of 1933 and the Investment Company Act of 1940, to regulate digital assets. This has resulted in a patchwork of state and federal regulations that have made it difficult for companies to navigate the legal landscape.
In the words of Maxine Waters, the chairwoman of the US House Financial Services Committee, “It is clear that the United States is falling behind other countries, particularly China, in the development of a comprehensive regulatory framework for digital assets.” Waters has urged the SEC to take a more proactive approach to digital asset regulation and to work with Congress to develop comprehensive legislation that provides regulatory clarity and consumer protection.
My take on MiCA and beyond
Despite the short-term pain, and to the dismay of crypto purists, I believe the EU’s MiCA regulation represents a major milestone in the regulation of the cryptocurrency market. While some in the industry may be concerned about the impact on innovation and investment, the clear and comprehensive regulation is long overdue and is critical for the growth of the crypto assets ecosystem. The US and other major jurisdictions should take note of the EU’s approach and work to create their own comprehensive regulatory frameworks for digital assets.
Originally published at https://www.thestreet.com on April 26, 2023.
