Crypto makes peace with new EU law, but what does it do?
Here’s how MiCA is changing the rules of the road for tokens, stablecoins and NFTs
The European Council is set to approve and implement the long-awaited Markets in Crypto Assets Act (MiCA). Expected to enter into force in early 2024, this is one of the first actions to bring cryptoassets, issuers and cryptoasset service providers (CASPs) under one regulatory framework.
But the companies dealing with digital assets must start adapting their activity to the new requirements now, in March 2023. A provision called the DLT Pilot Regime Regulation describes the sequence. The primary goal of MiCA is to protect consumers and investors from the increasing risk of digital assets, while increasing financial stability throughout the crypto market.
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MiCA is also part of the wider Digital Operational Resilience Act (DORA), which aims to protect the financial sector from malicious activity, fraud and fraud. So the big question is this: How will this regulation affect the crypto market, and what does it mean for new and existing projects and investors?
Implications of the MiCA Regulation
First, it is important to understand that MiCA defines cryptoassets as a digital representation of a value that can be transferred or stored electronically using distributed ledger or similar technologies. Under this new definition, even centralized currencies that work through blockchain or similar technology will be considered cryptoassets.
At the same time, MiCA has indicated that it will not apply to Central Bank Digital Currency (CBDC). Therefore, central banks will fully control their centralized cryptoassets regarding monetary policy and functional requirements.
The regulation will also require crypto miners to disclose energy consumption data to ensure their environmental impact. All assets using distributed ledger technology or DLT tokens will be required to publish a detailed business plan and whitepaper, among other obligations. All companies operating with or issuing DLT tokens must demonstrate a minimum seed capital of €200 million.
There is speculation in the industry that stablecoins will be illegal due to the new EU regulations. These concerns are far-fetched and untrue.
Blockchain and crypto-based projects will also need to demonstrate adequate security measures to ensure effective cyber security and minimize investor risk. Companies are obliged to establish clearly defined chains of responsibility towards customers for any losses as a result of operational failure.
Although these regulations focus on crypto-assets at length, they do not explicitly cover non-fungible tokens or NFTs. This is because regulation of NFTs is a complex process, given their ability to exist in different forms and types of media instruments (eg games, metaverse, artwork, music, etc.).
Will Stablecoins be invalidated under the MiCA regulations?
There is speculation in the industry that stablecoins will be illegal due to the new EU regulations. These concerns are far-fetched and untrue: the new regulations will put stablecoins under increased scrutiny, but they will still be valid.
Stablecoin issuers must now meet extensive requirements to conduct legal business. For example, issuers will have to prove that they have enough reserves to prevent their stablecoins from collapsing.
This ensures that catastrophic events like the LUNA UST and the FTX debacle do not happen again. The European Banking Authority will also have full supervisory rights for the stablecoin, meaning they can regularly audit and inspect the reserves to ensure their validity.
How will companies outside the EU fall under these regulations?
How will the MiCA regulations apply to companies registered outside this region? Companies outside the EU can still provide services to users within the area without being obliged to comply with the regulations. However, they cannot advertise or market themselves within the territory of the EU. To market their digital assets and services within the EU, companies must obtain a full license from MiCA and meet their regulatory requirements.
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Companies that do not follow these advertising and promotion laws will face severe penalties in the form of huge fines or even jail time for top executives. This is similar to the UK’s Advertising Act, which can jail crypto firm executives for two years for breaching advertising rules.
This is one of the most worrying parts of this regulation, as the documents published by the European Council do not clearly define what an advertisement is. As a result, companies can be penalized for having their names mentioned in an EU-based media or journal. Until these nuanced details are clarified, non-EU companies must tread carefully when marketing their services in the region.
Are these regulations a threat to decentralization and privacy?
While these regulations are a significant step toward making crypto a more sustainable and risk-free asset class, there are legitimate concerns about how it could affect innovation, privacy, and the foundation of decentralized assets.
For example, Article 68 of the MiCA implies that crypto trading platforms must prevent the trading of assets with built-in anonymization unless the service provider can verify the asset holder and their transaction history. While the specific implications of this rule remain vague, such strong language could have a detrimental impact on privacy functions in the industry.
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It is important to mention that DeFi services will be exempt from these regulatory actions. However, businesses that offer decentralized services in a centralized way or CeDeFi companies will still have to follow the MiCA regulations.
New regulations: a boost for the market?
I believe MiCA regulations will have a positive impact on the industry, pushing forward the innovation of crypto-related startups. Currently, a crypto company registered in one EU country can only offer its services in another EU country after obtaining a license there.
New MiCA regulations will, on the contrary, set the same licensing rules for the entire European Economic Area. As a result, the EU market will attract both startups and prominent companies, which will mean more healthy competition.
Overall, the EU regulations will have many positive and negative effects on the entire crypto market. However, crypto businesses operating in the region must achieve a sustainable solution to implement financial and AML (anti-money laundering) or KYC procedures, not only to ensure compliance, but also to protect their users from evolving threats from this innovative market.
Slava Demchuk is a member of Foresight Virtual Assets 2030, the European Commission’s strategic advisor for a sustainable and digital Europe. He is also the co-founder of AMLBot.
