Regulation
Cryptocurrency after the European Union’s MiCA regulation
Disclosure: The views and opinions expressed herein are solely those of the author and do not represent the views and opinions of the crypto.news editorial.
THE Markets in cryptocurrency regulation (MiCA) marks a significant milestone in the European Union’s journey towards regulating the rapidly evolving cryptocurrency market. Its timing and provisions hold enormous importance for both crypto firms and investors. As we approach crucial dates, starting with the implementation of stablecoin provisions on June 30, 2024 and the full implementation of MiCA on December 30, 2024, the cryptocurrency landscape is undergoing a transformation.
In the next two years
MiCA’s staggered timelines and transition periods, which extend until 30 June 2026, mean a period of fragmented implementation across the EU and European Economic Area (EEA). Jurisdictions such as Ireland (12 VASPs), Spain (96 VASPs) and Germany (12 VASPs) will grant a 12-month transition period. In contrast, other jurisdictions will offer more extended periods, such as France (107 VASPs) with 18 months, while Lithuania (588 VASPs) will likely only grant five. This transition phase will push market consolidation as not all existing service providers will obtain MiCA licenses. Many will look to capitalize on this interim period before closing operations.
The race among EU/EEA jurisdictions to become the main hub for crypto assets intensifies, with jurisdictions such as France, Malta and Ireland competing to take the top spot. However, regulatory preparedness and compliance for crypto-asset activities pose significant challenges. Regulators are facing an adjustment period to upskill their staff to process MiCA applications, particularly in jurisdictions with high volumes of applicants. The complexity of various business models, which include numerous products unknown to regulators, compounds this challenge. The general lack of skills to authorize and supervise this sector requires significant training efforts.
Challenges for crypto companies
MiCA, together with the wide range of related Level 2 measures (many of which are yet to be finalised) and other applicable EU instruments such as anti-money laundering laws, the Digital Operational Resilience Act (DORA), and the Electronic Money Directive (EMD), create a complex regulatory framework. Some will find it difficult to understand which provisions apply to each entity type and what documentation needs to be implemented.
The removal of crypto-assets, particularly stablecoins, from EU exchanges due to issuers failing to obtain licenses in time will pose significant obstacles and limit the availability of certain assets to consumers.
Adapting to MiCA will challenge many entities and require substantial investments in technology infrastructure. THE Travel RuleAt the same time as MiCA, the requirement that information must be shared between VASPs for each crypto transaction will also come into force. The Travel Rule requires CASPs to transfer a significant amount of information about the originator. This includes their address, personal identification number and customer identification number. In rare cases, disclosure of the originator’s date and place of birth may also be required. This adds another layer of complexity, further highlighting the need for harmonization within the EU and for solutions to comply with the Travel Rule that are interoperable and allow for secure data sharing while preserving user privacy.
Main results of the cryptocurrency market
Despite the challenges, MiCA instills confidence in EU entities through increased regulatory oversight, promoting investor protection and attracting mainstream institutional participation. Enhanced consumer protection measures mitigate risks such as fraud and hacking, promoting trust among retail customers.
MiCA reporting requirements will provide regulators across the EU with more data, enabling them to monitor market activity effectively. The ability to freely transfer activities across the EU will facilitate cross-border operations and reduce regulatory fragmentation, while broadening market reach.
The prescriptive nature and all-encompassing regime of MiCA has set a precedent for global regulatory frameworks. Other jurisdictions are already observing and may replicate some of MiCA’s provisions and approach, contributing to regulatory harmonization worldwide. However, concerns remain that it will stifle growth and innovation and whether companies will seek to move to more permissive and less restrictive jurisdictions.
Steps after MiCA
MiCA’s gaps in regulating emerging areas such as true defi (the provision of financial services or the issuance of financial assets without identifiable intermediaries and without a single point of failure), lending, and NFTs require ongoing policy discussions and additional regulatory action. Reports on these issues will inform future regulatory developments, potentially leading to a second iteration of MiCA in at least the next four to five years or additional action.
MiCA marks a new era of regulation in the cryptocurrency market, aiming to balance innovation with investor protection and market integrity. While challenges remain, MiCA lays the foundation for a more transparent, safe and inclusive crypto framework in the EU and beyond. As the cryptocurrency landscape continues to evolve, regulatory regimes must adapt to emerging trends and technologies, ensuring sustainable growth and fostering investor confidence.
Ernest Lima
Ernest Lima is a founding partner of XReg Consulting and a qualified lawyer with over 17 years of experience in the field of financial services regulation. As Head of Legal and Regulatory Policy at XReg, he has extensive experience in designing, developing and implementing cryptocurrency legislative frameworks that meet both global and local policy objectives. At XReg, Ernest leverages in-house expertise on cryptocurrency markets regulation (MiCA) in Europe to advise European clients or those looking to enter the European market. He also leads engagement with European public sector officials and national competent authorities in their transition to MiCA compliance. Ernest has also spoken at industry conferences and trained international regulators on MiCA regulation in Europe and how it will shape the future of the international cryptocurrency regulatory landscape. He also sits on the Financial Markets Law Committee to address issues arising from the use of cryptocurrencies and DLT.