Here’s how MiCA regulations will impact the European cryptocurrency market

Below is a guest post by Mike Romanenko, CVO and co-founder of Kyrrex.

The European cryptocurrency landscape is on the verge of a significant transformation with the introduction of the Markets in Crypto-Assets (MiCA) regulation. Mike Romanenko, CVO and co-founder of Kyrrex, predicts it will present multiple opportunities and challenges for cryptocurrency operators in European countries.

Expected changes after MiCA adoption

THE MiCA adoption in European countries marks a monumental shift for the cryptocurrency industry. For market participants, this regulation introduces strict rules that govern various aspects of the industry, including cryptocurrency exchanges, fund custody, and customer verification processes. While these rules may initially seem rather burdensome, they are designed to improve the security and transparency of cryptocurrency operations.

More importantly, a primary goal of MiCA is to protect end users by ensuring that companies adhere to transparent auditing practices and maintain verifiable reserves. This need for transparency has become especially apparent following the numerous collapses of large cryptocurrency companies since 2020, most notably The collapse of FTXwhich highlighted the vulnerabilities and risks of the sector.

I believe that regulation will facilitate the entry of institutional investors into the cryptocurrency market. By establishing clear and consistent rules, MiCA can help attract significant institutional and corporate funds, increasing market liquidity and stability. This situation mirrors the introduction of Bitcoin ETFs in the United States, which allowed institutional investors to gain exposure to Bitcoin through regulated financial products.

The challenge of implementation

Despite the long-term benefits, I never expected the initial implementation phase of MiCA to be easy. There are currently around 2,000 Virtual Asset Service Providers (VASPs) in Europe, many of whom are slow to comply with the upcoming regulations. Local authorities will face significant pressure to review and approve applications in a timely manner, which could lead to a potential backlog and operational delays.

Some countries, such as Malta and France, have already begun to align their regulations with MiCA, but overall readiness across Europe varies significantly. I expect this disparity could cause a period of confusion and disruption as businesses strive to meet the new standards.

The entire process is planned for three years, from June 2023 to July 2026, and includes the following phases:

• Entry into force of MiCA (June 2023).
• Deadline to waive or reduce the duration of the safeguard clause (June 2024).
• Entry into the MiCA application (December 2024).
• End of transition phase (July 2026).

MiCA has the potential to have a significant impact on the cryptocurrency market within the EU. I would like to highlight the following expected effects:

• Greater consumer protection. The aim of MiCA is to establish clear rules for cryptocurrencies, ensuring better protection for investors.
• Greater market integrity. By setting governance standards, MiCA aims to promote fair competition and prevent market abuse.
• Simplified cross-border transactions. A harmonised regulatory ecosystem will make it easier for EU companies to operate across borders.
• Drive for innovation. The pilot scheme for market infrastructures based on distributed ledger technology (DLT) could lead to more efficient financial systems based on blockchain.

I would say the key aspect of MiCA is the new classification for cryptocurrencies, known as CASPs: cryptocurrency service providers. It includes exchanges, custodial wallet providers and trading platforms, which will be subject to authorization by national authorities. The classification aims to ensure that all entities providing cryptocurrency services comply with the same regulations.

Regulatory Challenges and Opportunities in the United States and Other Countries

Unlike Europe, the United States does not have a unified regulatory framework for cryptocurrencies, which leads to considerable uncertainty. While Bitcoin is classified as a commodity, the status of other digital assets, such as Ethereum, remains ambiguous. Despite what I wanted to see, this lack of clarity complicates compliance and increases the risk of regulatory action against cryptocurrency companies.

However, there are many positive developments. The introduction of Money Transmitter Licenses (MTLs) for cryptocurrency exchanges has provided a path for companies to legally operate in more states. Full federal regulation is still pending, and is unlikely to be addressed before the next election.

We hope that the implementation of MiCA in Europe can serve as a valuable model for other regions, including the US, UK, Turkey, and India. I would like to see countries like India, where cryptocurrencies are currently banned, have a MiCA-inspired regulatory framework pave the way for legalized and safe cryptocurrency operations. Similarly, Turkey has faced significant challenges with unregulated exchanges, which have led to substantial losses for investors. Who would have thought that adopting a structured regulatory approach could mitigate such risks and foster a healthier cryptocurrency ecosystem?

Leader in cryptocurrency regulation and compliance

Here are some of the ways in which leaders are promoting smart regulation of the cryptocurrency sector to reshape the European cryptocurrency market:

• Commitment to transparency. Regulated and compliant entities leverage blockchain technology within their centralized infrastructure, improving transparency and efficiency. This approach is evident in the implementation of blockchain technology in internal transactions. Such integrations ensure that all transactions are traceable and secure, aligning with the rigorous standards expected of regulated companies.
• Rigorous compliance monitoring. A key aspect of regulatory compliance is the monitoring system. It includes internal compliance teams and external auditors who conduct semi-annual reviews to ensure adherence to all regulatory requirements. A notable feature of the compliance infrastructure is the real-time audit log server. It records all actions within the system, especially from the back office, providing 24/7 access to external authorities for real-time monitoring. This system ensures that any irregularities are quickly identified and addressed, reinforcing the company’s commitment to transparency and security.
• Future-proofing through strategic investments. Strategic investments should extend beyond compliance, focusing on the integration of new technologies. By staying in touch with current market trends, companies aim to incorporate the latest advancements into their ecosystem. This approach not only enhances their service offerings, but also ensures that they remain at the forefront of industry developments.
• Expansion of regulatory licensing. The companies are working to obtain additional regulatory licenses to expand their service offerings. One of their goals is to acquire the Markets in Financial Instruments Directive (MiFID) license, which allows them to provide regulated derivatives trading in Europe. This move is poised to fill a significant gap in the market, offering a transparent and compliant platform for futures and perpetual trading.
• Adapting to the global market. In addition to Europe, the companies are also keeping an eye on the US market, despite the current regulatory uncertainties. By obtaining Money Transmitter Licenses (MTL) in various states, they intend to strategically expand their presence in the US. This expansion underscores their commitment to navigating complex regulatory landscapes to offer secure and compliant services globally.
• Innovation for the future. The long-term vision includes developing a comprehensive financial super app that integrates a wide range of services into a single platform. Companies are interested in optimizing blockchain technology to reduce transaction fees and improve the overall user experience, further driving adoption.

Conclusion

The implementation of MiCA is a significant step towards creating a safe and transparent cryptocurrency market in Europe. While I expect the transition to be challenging, the long-term benefits of improved regulation, increased institutional investment and greater market stability are substantial.

Furthermore, MiCA’s framework could serve as a model for other regions seeking to effectively regulate their cryptocurrency markets. As the global cryptocurrency industry continues to evolve, the lessons learned from Europe’s regulatory journey will be invaluable in shaping the future of digital assets around the world.

As the cryptocurrency industry continues to develop, the importance of strong regulatory compliance cannot be overstated.

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