European Council Approves Law on Crypto Regulation

The European Union (EU) has taken a major step forward in cryptocurrency regulation, with the European Council approving comprehensive Markets in Crypto-Assets (MiCA) regulation on 5 October. The development marks another significant action taken by European authorities to ensure the crypto market plays by their rules. The bill is awaiting approval by the European Parliament; a vote is scheduled for October 10.

Once passed, the bill is likely to have a massive impact on the crypto market due to its broad reach. Among the many areas it addresses are money laundering prevention, consumer protection, crypto company accountability, the environmental impact of the industry and stablecoins.

The controversial MiCA law is sure to spark debate on the crypto industry. It could also be just the first in a series of changes coming to the global crypto market. The European regulation lays the groundwork for what could be a new era in operations for major crypto entities.

MiCA addresses Stablecoins, money laundering, environmental impact

The Markets in Crypto-Assets bill is a comprehensive regulation that aims to bring the asset class under the supervision of the European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA).

A debate about whether cryptocurrency is a security or a commodity is also addressed in the bill. Under MiCA, cryptocurrencies are divided into four categories: cryptoassets, utility tokens, asset-referred tokens and electronic money tokens (e-money). Cryptocurrencies will be regulated according to their classification.

The bill’s broad focus means it is likely to have a strong influence on the global crypto market. Among the many areas it seeks to oversee are money laundering prevention, consumer protection, crypto-company liability, the industry’s environmental impact, and stablecoins, which minimize typical cryptocurrency volatility by maintaining security in the form of reserves, often of US dollars.

Stablecoins are a particularly important part of the regulatory framework, and the EBA will oversee this aspect. MiCA mandates that stablecoin issuers maintain minimum liquidity to prevent crashes like TerraUSD, which was supposed to be worth exactly $1 but plummeted in value starting May 9, 2022. It was trading at around 3 cents on October 6, 2022.

The reserves of stablecoin issuers must also be protected from insolvency as part of the bill. It also requires “major coins” used as means of payment to be limited to transactions worth €200 million per day.

In terms of money laundering, MiCA requires the EBA to keep a record of non-compliant crypto asset service providers. There will also be additional controls in place to ensure compliance with anti-money laundering (AML) rules.

The EU is moving quickly on MiCA

The MiCA regulations were proposed in a first preliminary draft in June 2022, with some changes and updates in the following weeks. It does not address decentralized finance (DeFi) or non-fungible tokens (NFTs) yet, although officials are likely to tackle the regulation of these sectors in the future.

While there have been some doubts about some of the details of the EU regulation, the crypto industry has largely welcomed it, as it takes a clear stance on digital assets. Many industry players believe that the European regulation will allow the market to expand because relevant parties understand what the rules of the game are.

While the European Council has adopted the regulation, it still requires the approval of the European Parliament. This vote is scheduled for October 10. If approved, the regulation will likely enter into force in 2024. That should give crypto entities plenty of time to adjust to the landmark changes.

The bottom line

MiCA will probably be adopted and authorized in early October 2022. This will be a milestone for the cryptocurrency market, as there has not yet been such a comprehensive set of regulations in place. Other regions will likely look to this regulation as they design their own crypto regulatory strategies. In the meantime, crypto companies will have to start making adjustments that will allow them to continue operating in the EU once the regulations take effect.