Crypto’s regulatory gray area is handled by the EU under MiCA legislation

For years, one of the biggest challenges was regulating cryptocurrency adoption. Trying to ensure anonymity while holding them accountable for illegal use has been a struggle. However, the EU has now passed legislation that will not only look at tracking crypto transfers, but also create common rules for oversight, consumer protection and environmental protection of crypto assets. This is called Markets in Crypto Assets Legislation or MiCA for short.

MiCA will cover crypto-assets that are not regulated by existing financial legislation. Key provisions for those issuing and trading crypto-assets (including asset reference tokens and e-money tokens) cover transparency, disclosure, authorization and supervision of transactions. The legislation was adopted with 517 votes in favour, 38 against and 18 abstentions.

It should also be noted that this will mean that consumers have a greater understanding of the risks, costs and charges associated with crypto. Hypothetically, if a crypto disaster like the FTX meltdown or the Terra Luna bankruptcy were to occur again, consumers would be better informed and protected before committing their money to the digital asset.

This sentiment was supported by Ed Stittlefounder of accounting firm ESDG accountingwho said: “While MiCA, like much regulation, risks damaging innovation in the industry by restricting new entrants, the legislation is largely welcomed by my customer base.

“Crypto as an investment class has recently suffered through scandals such as FTX, causing a drop in value – so this EU legislation is most welcome to reinforce crypto’s competitiveness as an investable asset. This is necessary with any investment class that matures and attracts investors from a wider audience.”

A milestone for EU crypto

The legislation is a milestone for regulators in Europe. Where crypto had previously been described as the Wild West, law and order must now be brought into place. Speaking of the success of MiCA’s approval, Alice DiCapriochief economist in the blockchain company R3 said: “Smart regulation for cryptos like MiCA is essential to provide the necessary guidelines for how the underlying distributed ledger technology for these assets is used.

“This will serve as a platform for future innovation which is essential as global competition across technology and financial services intensifies. Europe is taking a major step forward in positioning itself as a leader in digital financial innovation – also highlighted in the recent launch of the DLT Pilot Regime.

“Regulatory and legal certainty provide the core foundation for any new technology to be used successfully. The fact that the EU is taking the lead in laying this foundation will undoubtedly make it an attractive destination for more companies in the area to set up and invest in. It would would be a surprise if other jurisdictions such as the UK and US are not quick to follow suit and further accelerate their crypto regulatory efforts.”

Nicholas Denisenkoco-founder and CTO of Brighty app, a Swiss neo-digital bank said: “The acceptance of MiCA regulation in Europe marks a pivotal moment for the financial industry. It showcases the EU’s progressive attitude to embrace digital assets and promote innovation in the fintech sector. As a neo-bank startup, we celebrate MiCA’s potential for to streamline operations and improve consumer protection in the crypto market.

“The regulatory clarity provided by MiCA is instrumental in increasing investor confidence, thereby accelerating the growth of the crypto ecosystem. Overall, MiCA paves the way for a more transparent, secure and sustainable future for digital assets in Europe.”

The travel rule

In June 2022, the European Parliament decided that crypto transfers, as is the case with any other financial operation, should always be tracked, with suspicious transactions blocked. After the approval of the law, the so-called “travel rule”, which is already used in traditional finance, will cover transfers of crypto-assets. Information about the source of the asset and its beneficiary will need to “travel” with the transaction and be stored on both sides of the transfer.

Mark FosterEU policy analyst at Crypto council for innovation discussed the travel rule’s impact on crypto, saying, “What’s really valuable is the legal certainty MiCA offers the crypto industry. There are clear rules for stablecoins and exchanges. These rules cover operations, including registration, reporting and disclosure, asset segregation and capital requirements.

“Clarity at an international level will make a big difference. It could draw many companies away from the US, bringing new jobs and investment to the region. It is also worth noting how the EU has handled newer parts of the ecosystem. Their “wait and see” approach with DeFi and NFTs shows a thoughtful pause to analyze and learn more about what these innovations can do.

“With the TFR, the EU implements the internationally agreed travel rule, bringing crypto into the regulatory perimeter in terms of AML provisions. It is important that the soon-to-be-finalised, broader EU AML package does not deviate from the TFR, as this would lead to unnecessary divergences and conflicting rules, particularly around due diligence for non-hosted wallets.”

Comparing crypto regulatory developments across the pond

The cryptocurrency regulatory gray area has remained for so long due to the inability to define crypto. Is it a commodity or a security? Depending on who you ask, you will get very different answers. For example earlier SEC Chairman Jay Clayton stated that both Bitcoin and Ethereum are not securities.

Current SEC Chairman, Gary Gensler, has explained that, with the exception of Bitcoin, cryptocurrencies are actually securities. He stated: “Crypto financial assets have the key attributes of a security.”

While there has been confusion in crypto regulation in North America, Judge’s ruling has Analisa Torres of the Southern District Court of New York on SEC versus Ripple Corporation case will advance how cryptocurrency is governed across the United States.

The knock-on effect

Sue Friedmansenior director, global policy, Ripple, the crypto payment protocol, told Fintech Times how she thought would affect the crypto sector. She said: “The European Union’s approval of MiCA is a hugely important step in bringing clarity to the crypto industry both in Europe and globally. While we must wait for the regulation to be fully adopted, this landmark decision is an important step forward in providing clarity for those already participating and those planning to invest in the European crypto industry.

“It builds on Europe’s early movement in the space and highlights the need for continued momentum towards regulatory clarity globally.

“Longer term, MiCA should ensure a thriving crypto ecosystem that supports innovation and growth, while building confidence in the utility of the technology. With the demise of MiCA, Europe has demonstrated global crypto leadership, and the announcement will serve to continue the momentum that has seen global crypto firms enthusiastically build businesses and innovate throughout the region.

“We look forward to seeing how MiCA will provide a blueprint for other jurisdictions to build out their own regulatory frameworks.”