Regulation
What is missing from the complete MiCA cryptography manifesto?
Disclosure: The views and opinions expressed here are solely those of the author and do not represent the views and opinions of the crypto.news editorial team.
In April 2023, the European Union passed a sweeping piece of legislation to finally control the cryptocurrency and blockchain industry. Regulation of cryptocurrency markets (MiCA) is a bold and pioneering initiative to apply a unified regulatory framework to the industry and establish clearer laws for cryptocurrency service providers and token issuers.
Considered a milestone in the cryptocurrency regulatory landscape, MiCA has recently approved a provision to address stablecoinswhich have long been considered difficult assets to regulate due to their unclear classification and common use in cross-border transactions. Following the approved regulation, Circle, the issuer of the USDC stablecoin, has become the first stablecoin issuer to be formally recognised as compliant with EU cryptocurrency legislation.
The new status granted to Circle has led many to reflect on the implications of MiCA on 160 billion dollars aggregated stablecoin supply as well as the broader crypto and web3 economy.
While the idea behind the most thorough attempt to regulate cryptocurrencies is to protect investors by placing accountability on organizations that issue digital assets and provide services, welcoming new users and fostering innovation while ensuring competition, it will take time to assess its full impact.
The idea for MiCA was born from a wave of ICOs in 2017 and 2018 that raised concerns about scams, fraud, and other manipulations that could disrupt financial stability within the European bloc. After years of research, due diligence, and good intentions, MiCA deserves a lot of credit for its approach to balancing regulation and innovation, a clear recognition of the technological and business advantages of cryptocurrencies and blockchain. Additionally, MiCA strengthens stability, investor confidence, transparency, and oversight with its comprehensive legal framework.
But the MiCA has some blind spots.
While the regulatory framework recognizes the importance of bridging cryptocurrency service providers and traditional finance, it offers little in the way of making this a reality. Indeed, the growing overlap of trading and digital assets bodes well for increased adoption and has likely contributed to the maturing of a cryptocurrency ecosystem, but MiCA places limitations on stablecoins that seem counterproductive.
Stablecoins not pegged to the euro cannot be used in transactions for goods and services and are subject to daily limits on the number of transactions (up to one million) and their total value (200 million euros). This essentially places usage limits on USDC and USDTthe two main stablecoins, even if certified as compliant with MiCA.
And because stablecoins are so essential to facilitating transactions, enabling defi, and powering nearly every aspect of the industry, these restrictions could potentially impact liquidity and disrupt defi innovation and activity, undermining a core pillar of MiCA’s mission.
Furthermore, these limitations are compounded by the fact that MiCA does not emphasize interoperability, one of the most pressing needs of the industry, nor does it seem interested in encouraging crypto-fiat payment solutions, key avenues for strengthening liquidity and stimulating innovation beyond cryptocurrencies.
While it is too early to know how MiCA’s stablecoin approach will develop, European regulators can do more to address interoperability and payments between ecosystems to future-proof its economy and avoid market fragmentation. This can be improved by working with EU organizations such as Horizon Europe and the European Innovation Council to find innovative startups that tackle sectors that MiCA has neglected.
For example, Kima, a peer-to-peer, asset-agnostic money transfer and payment protocol, provides an interoperable settlement layer for interchain and crypto-fiat transactions. By removing barriers between blockchains and between traditional financial instruments and blockchain networks or decentralized apps, the Kima protocol allows developers to access greater amounts of liquidity. This also benefits non-native cryptocurrency users and financial institutions by allowing funds to flow in all directions.
MiCA will undoubtedly serve as a standard-bearer for cryptocurrency regulation, guiding other nations and economic blocs on how to regulate a growing, complex, and volatile market that holds much promise. It is important that in its simple desire to protect its monetary interests, it does not neglect other areas that impact the industry’s ability to grow.
The EU has demonstrated a willingness to adapt and study trends as they emerge, and in the fast-paced world of cryptocurrencies, this is necessary to ensure that adequate measures are taken to protect investors and the integrity of the entire industry.