Regulation
Understanding Markets in Crypto-Assets (MiCA), the new EU regulatory framework for cryptocurrencies
The European Union is breaking new ground as its first-of-its-kind crypto regulatory standards go into effect across the region. Cryptocurrency Markets, or MiCA, represents a significant step in creating a regulatory framework for cryptocurrencies in the EU.
This set of global measures aims to create a coherent framework that regulates cryptocurrencies and digital assets while protecting investors. One of MiCA’s goals is to improve financial stability in the cryptocurrency market.
The rules could influence other developed markets to follow suit with more comprehensive regulations of their own.
What is MiCA, the cryptocurrency market regulation?
The European Parliament approved the MiCA in 2023 after the collapse of FTX and its $8 billion fraud, but the new rules may be even more necessary now. After all, they are designed to ensure a stable crypto market and protect investors.
Cryptocurrency companies and exchanges are turning to increased regulation in the wake of the FTX fraud as a form of legitimacy and a way to rebuild trust with investors, Mardi MacGregor, partner at Fox Williams LLP, told Converge in a recent podcast .
He added: “I think transparency and regulatory compliance are really crucial when it comes to rebuilding trust in the cryptocurrency industry.”
This is the basis of the EU framework, which will come into force in two phases during 2024.
In June it will cover issuers of stablecoins, asset-referenced tokens and e-money tokens as part of the assets regulated by MiCA. In December it will include other cryptocurrency service providers, highlighting their vital role in the regulatory framework established by MiCA.
New protections for cryptocurrency service providers to build trust in digital assets
MiCA applies to crypto assets not already covered by EU regulations. The measure will not regulate Bitcoin and other tokens without issuers.
Crypto asset services, including trading platforms, will be required to advise consumers of the risks, costs and charges of trading these digital assets. Many of these services are based on distributed ledger technology, which underpins the operation of crypto assets and is a key focus of MiCA regulation.
Safeguards are also in place to prevent market manipulation and financial crimes, including money laundering, terrorist financing and other criminal activities. THE European Securities and Markets Authority (ESMA) was required to “establish a public register for non-compliant cryptocurrency service providers operating in the European Union without authorization.”
Additionally, the new rules require “significant” cryptocurrency service providers to disclose their energy consumption as the EU seeks to monitor and reduce the sector’s high carbon footprint.
How will MiCA work in the European Union?
MiCA regulations require companies to register with the EU when issuing, trading, providing custody or otherwise managing crypto-assets in the 27-nation common market.
The new rules also make it easier to track transactions. To provide crypto asset services under MiCA, entities will need to register and meet specific regulatory requirements, highlighting the importance of compliance in the evolving digital asset landscape.
MiCA will not include non-fungible tokens (NFTs), but the framework will cover digital wallet transactions above 1,000 euros between a person’s crypto-asset wallet and a service provider. Person-to-person transfers or suppliers trading with each other will not be subject to the new rules, at least not initially.
Electronic money institutions, among other entities such as CRR lenders and MiFID investment firms, can provide cryptocurrency services under MiCA, which complements existing financial services legislation by covering cryptocurrencies not previously regulated.
Stablecoins will also be covered by MiCA. THE blockchain-based token can be tied to hard currencies on a one-to-one basis redeemable by an issuer, which typically holds reserve assets in cash or investment grade securities.
MiCA requires stablecoins to maintain sizable reserves to meet potential ransom demands (i.e., a virtual run on the digital currency). It also places trading limits on the largest stablecoins with tighter controls on non-euro-denominated ones.
MiCA, compliance and the future of the crypto regulatory framework
There are, of course, financial penalties which can reach tens of millions of euros for people or entities found in default.
The European Banking Authority plays a crucial role in overseeing compliance with MiCA, particularly in relation to asset-referenced tokens and e-money tokens, ensuring that issuers adhere to the regulatory framework.
Cost savings are a big benefit from uniform regulations in the EU. Cryptocurrency experts note that piecemeal laws in markets like the UK and US create a higher barrier to entry and operation for cryptocurrency companies to comply.
MiCA distinguishes between cryptocurrencies and traditional financial instruments, excluding certain assets from its scope if they qualify as “financial instruments” under the updated Markets in Financial Instruments Directive (MiFID II), thus simplifying the regulatory process for cryptocurrencies.
If these other markets were pushed to update and consolidate their own laws and governance requirements, perhaps following MiCA’s lead and adhering to the same standards, it could save money and headaches for many in the cryptocurrency industry.
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