Last week, the European Parliament, the EU’s law-making body, enacted the Markets in Crypto-Assets (MiCA) regulations following a somewhat nonevent April 20 vote. The latter event concluded with 517 in favor, 38 against, while 18 abstained. Though MiCA needs approval from the European Council before it can become enforceable, the resounding display of support during the finalization of the landmark law indicates it is unlikely to be challenged in the final administrative step on May 16.
In reaction to the news, several digital asset entities, including virtual asset providers, have shown a disposition to modify their operations in compliance with the new regulations in the last few days. The lawmakers separately voted 529-to-29 in favor of the Transfer of Funds regulation after an April 19 debate.
The crypto licensing & funds transfer rules also cover crypto wallet providers, exchanges and stablecoin providers. Issuers whose offerings draw market value from other assets must maintain sufficient reserves. The package outlines consumer protection and other supervision guidelines to combat money laundering. Transfers involving digital assets will now be subject to the ‘travel rule’ akin to that in TradFi, which mandates that key transaction details be captured and stored by service providers on both sides of the transfer.
Here are the salient points from the new regulations, reactions thus far and an assessment of the regulatory landscape in individual jurisdictions:
Markets in Crypto-Assets Act (MiCA) scope and timeline
Thursday’s vote outcome of a 13 – 1 margin marked another success in the draft of the law package introduced in 2020. Some key details remain to be ironed out before it enters into the Official Journal of the European Union in June. In the meantime, the European Securities and Markets Authority and the European Banking Authority are expected to sew up specific guidelines.
A version drafted in English was first agreed upon by the Council in July 2022, followed by a preliminary deal last fall. The European Parliament Committee on Economic and Monetary Affairs confirmed the comprehensive crypto rules in an October vote concluding 28-to-1 favor. The legal framework, however, faced two delays ahead of its passage. In the most recent instance, in January, the EU Parliament pushed back the previously agreed-upon February date a further two months, citing translation issues into the block’s 24 official languages. The first delay in November similarly revolved around the technical nature of the legislation’s text.
Significance and implementation: Regulation towards credibility
MiCA is considered a huge milestone as it represents a uniform legislative framework for operations within the European Union. MiCA seeks to lay the foundation in the form of a common standard of rules to properly govern the sector in Europe. It will shed light on grey areas, including regulation of digital assets not currently under the oversight of existing financial services laws.
The 571-page draft bill document includes rules on the formation, undertaking, and governance of issuers of virtual assets within the bloc. Specific provisions related to stablecoins will take effect starting July 2024, while enforcement of others, including those on CASPs, will follow later in January 2025. Overall, the highly-awaited package will mark a new regulatory era for the region.
Startups have been highlighted as potential beneficiaries of its implementation. Proponents reckon its adoption will give the niche cachet that would appeal to investors who have mostly retreated to the sidelines. Industry experts believe that the framework’s licensing requirements could also, in the long run, help redeem the sabotaged relationship between banking institutions and crypto companies. Several banks that have exited the space or frozen their interest in the aftermath of March’s banking crisis would be willing to collaborate with licensed entities.
Reactions from the crypto community
The preliminary approval expectedly drew comments from various sects. MiCA will provide legal certainty on several generalities within the digital assets industry, hence the sentiment that its implementation will buoy investors. Industry experts remarked on the approval outcome, hailing the law as a landmark piece of regulation. Meanwhile, crypto executives mostly expressed optimism about MiCA’s potential role as a stamp of approval for crypto-assets service providers (CASPs).
“The fine details will matter, but overall, we think this is a pragmatic solution to the challenges we collectively face. There are now clear rules of the game for crypto exchanges to operate in the EU,” Binance’s CEO CZ posted in a tweet.
Coinbase’s team shared similar sentiments on the importance of MiCA in protecting investors.
“This comprehensive framework will give crypto organizations the confidence to invest and grow in the region,” Coinbase said.
Gemini co-founder Tyler Winklevoss chimed in as well, taking a dig at the US’s sluggish pace and lack of clarity.
“While US regulators have been busy infighting and refusing to provide the most basic of clarity for the crypto industry, the European Union just approved the MiCA regulation, which provides a comprehensive regulatory framework for crypto in Europe.”
The forthcoming rules could further inspire confidence to jump into blockchain solutions. Regulatory uncertainty has, in the past, been a hindrance to widespread adoption. SettleMint CEO Matthew Van Niekerk opined that the legislation could boost interest among potential customers, including banks, seeking to try out innovative solutions like tokenized bonds.
Not to be lost with all the good MiCA could result in, the framework has some protruding shortcomings. The EU’s MiCA left room for further rulemaking around non-fungible tokens (NFTs) and decentralized finance (DeFi). The exclusion of these aspects is a workable compromise to provide room for further study of innovations. On the other hand, it shows the abridged nature of the package.
Misses on MiCA
Elizabeth McCaul, European Central Bank’s supervisory board member, warned earlier this month that the proposed regulations are inadequate to govern crypto and would need to be reinforced. McCaul argued that CASPs must subscribe to stricter requirements and increased scrutiny. She worried that the current classification of crypto-asset service providers is inefficient and inconsiderate of the size of the biggest crypto exchanges.
The veteran investment banker pointed to the defunct FTX, which would not have been considered significant under MiCA as it doesn’t clock the 15 million active users’ threshold. Binance, which has between 28 to 29 million active users globally, would also have yet to qualify as significant under the EU standards. In lieu, the ECB board member recommended adopting quantitative metrics that genuinely represent the significance of CASPs, considering specifics such as trading volumes and assets under custody for custodial firms.
Regulatory status in individual European countries
Europe remains committed to becoming a flagbearer bloc, and so are some of its member states.
France aims to remain a mile ahead
Several European countries, including Germany, Malta, and Estonia, also have concrete regimes. None has, however, struck the optimal balance between attracting investments, protecting consumers, and stabilizing markets in its preparation for MiCA regulations as France.
Last month, USDC issuer Circle revealed plans to register in the country as a crypto service provider, with CEO Jeremy Allaire praising the country’s “comprehensive efforts towards innovation-forward crypto regulation”. Itself Circle is preparing for the MiCA regulations and their sweeping effect across the bloc, thus settling in a jurisdiction whose current digital assets service providers regulatory framework PSAN has already ratified 66 crypto firms was strategic for the company.
Ukraine wants to be among the first countries to implement MiCA
Ukraine was among the first to react to the approval, with authorities indicating that it intends to adopt the forthcoming regulations. Lauding the legislative framework, Yaroslav Zheleznyak, a senior Ukrainian lawmaker, said the government was keen on supporting the implementation of some of its provisions. These efforts will involve relevant agencies, including the National Securities and Stock Market Commission.
The remarks from the Deputy Head of the Parliamentary Committee on Finance, Tax, and Customs Policy were collaborated by a communication from the National Securities and Stock Market Commission.
“This is a truly historical event; I am sure Ukraine will […] implement this regulation into national legislation. At the moment, the text of the draft law is almost ready, and soon, we will start discussions with the main stakeholders,” a communication on the commission’s official website read.
The Eastern European country is considered a candidate state of the EU following its membership application in February 2022 and achievement of the status in June.
UK government feels pressured to deliver its framework
Some observers also pointed out the apparent contrast in progress and approach of the framework relative to national-level legislation. In Europe, the focus has been chiefly on the UK, whose poorly-structured legislation for digital assets has left it trailing in its bid to become a global hub for blockchain technology. The British government earlier in February revealed specifics of crypto legislation plans and opened a consultation period for suggestions on the same, elapsing at the end of the month.
In an April 18 interview with CNBC, the Economic Secretary to the Treasury, Andrew Griffith, said specific laws aimed at restoring order in the crypto industry could arrive within a year.
UK’s phased crypto regulations, which are gradually coming up at present, are adaptable as they build on existing financial principles. They have also incorporated some elements of the bloc’s EU laws and could prove even more ideal in the constantly-evolving sector.
“There are aspects of [MiCA] which are interesting, and I think everybody likes so we have factored that in our paper,” Gwyneth Nurse, Director General, Financial Services at HM Treasury, said at the recently concluded Innovate Finance Global Summit.
Industry leaders also reckon that the slow pace and insistence on introducing the laws only at the right time could eliminate the need for future amendments. There has already been talk of a potential MiCA 2.0, which will include follow-up legislative rules to address items left outside the scope of the upcoming one. The UK government will discuss the specifics of its forthcoming crypto legislation until the end of April.
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