Europe’s MiCA could pave the way for a crypto revival

Unlike many of my crypto contemporaries, I have long been a proponent of regulation. While it may not align with the underlying libertarian principles of the movement, we must be pragmatic. To successfully deliver our decentralized vision, we cannot let the perfect be the enemy of the good. Compromise is essential if we are to live harmoniously with the fiat financial system. A big part of that is submitting to the right kind of regulation.

But until now, much of the proposed compliance has been inappropriate, impractical, or a staggering overreach of authority. The main problem has been the arm’s length approach regulators and lawmakers have taken to governing, especially in the U.S. Instead of cooperating with the crypto industry, there has been a concerted effort to lock us into existing regulatory frameworks that simply don’t apply.

The European Union’s framework for Markets in Crypto Assets (MiCA) is different. For the first time, it feels like the perfect example of public regulators working with industry to create a set of laws that offer a mutually beneficial way forward.

In late September, the full text of the MiCA framework was leaked online. At over 1,000 pages, it lists Europe’s landmark crypto-licensing regulation, which is likely to come into force in 2024.

The original draft of MiCA had some extreme proposals that would have been incredibly destructive to the crypto industry. Clauses such as requiring “know your customer” for all non-fungible token (NFT) marketplaces, banning decentralized finance (DeFi) and crashing Bitcoin’s price to kill proof of work. Fortunately, bigger, more reasonable minds prevailed. According to reports, the more extreme policy is absent from the final draft. In my opinion, what remains is a reasonable approach that could pave the way for the next crypto bull run – and here are some reasons why.

1. Kick out the cowboys

While the crypto movement has noble intentions, the industry has been plagued by nefarious activities that have severely damaged its reputation and seen investors lose millions to fraudsters and scammers.

The 2017 era was full of projects that published a white paper and raised millions in investment money through an initial coin offering (ICO), only to disappear with the funds. While this was not true for all projects, implementing strict rules around ICOs and product launches would effectively wipe out “exit fraud”. By requiring the development of a detailed white paper and holding authors accountable for delivery and timeline, only legitimate projects will see the light of day.

At its core, regulation is about consumer protection. So it’s encouraging to see Europe taking a balanced approach that tackles the fraudsters head on, while allowing people to decide how much exposure they have to the industry.

2. Clearly defined roles

There are times when it has felt as if governments have tried to regulate the industry out of existence. In the US, there was an attempt to pass legislation that would essentially group everyone involved in buying and facilitating crypto services with the exchanges that sell coins. Doing so would have placed impossible demands on the average crypto user and likely closed the doors to many services.

MiCA recognizes differences between actors participating in the industry and clarifies how the regulator should view them. This delineation is exemplified in their understanding and resulting definition of emissions (or block subsidies, as they are sometimes referred to). They accept that people who earn rewards through effort do so through work.

The MiCA definition means that emissions (stake/mining rewards) generated by consensus are protected as income rather than dividends for investments and ensures that genuinely decentralized crypto-assets remain protected by the fundamental philosophies on which they are built.

3. Protection of DeFi Providers

Under MiCA, the providers of DeFi platforms can also breathe a sigh of relief. There have been attempts to make them responsible for all activity on their network. This is unfair in the same way as making an internet service provider responsible for everything their users do on the internet.

Certainly, there should be clear compliance to ensure that users are protected and that fraudsters and others are limited in what they can do on a network, which is precisely the approach that MiCA appears to be taking.

The MiCA framework appears to provide full protection to DeFi vendors. It says that if something is genuinely decentralized, the people who created the protocol are not responsible for everything on their network.

4. NFTs remain a gray area

There is still some confusion about how to define non-fungible tokens (NFT). As a result, MiCA is not 100% aware of how to handle them. On the one hand, there is an acceptance that they are tokens, but on the other, they do not work in the same way as cryptocurrency. Ultimately, it will probably be necessary to create a new category for them, which is not currently covered by the European framework.

This confusion needs to be cleared up. Large, non-crypto brands will be an important vector to bring users into the space, and NFTs are an important vehicle to do so. However, they will only do that if there is clarity in what they can and cannot do.

As a broader point, it is also important to clarify how non-crypto companies work with the crypto industry. There are huge partnership opportunities, and precise regulation will ensure that we can exploit these opportunities as much as possible.

5. Stablecoins, Sovereignty and National Security

As might be expected, MiCA is not devoid of protectionist policies. The authors understand that stablecoins can pose a significant risk to national currencies. While the European legislators do not seem to want to eliminate them, they clearly want to ensure that stablecoin issuers continue to secure support using the assets managed by the state.

The framework is focused on ensuring that stablecoins are linked to a basket of sovereign debt or auditable euros. As long as it is linked symbiotically with their currencies, they are fine with it.

But something like Dai – an algorithmically stable coin that is solely backed by other cryptocurrencies – can be a problem because you are now shifting towards a world with a challenger currency that can become more useful and eliminate the sovereignty of fiat currency.

Ultimately, when looking at the different regulatory frameworks coming from developed economies, it is clear that each government is examining approaches they believe will protect their sovereignty and economy. Unfortunately, in the US that means a heavy-handed approach that overreaches and fails to regulate according to the technology. The good news, however, is that Europe is approaching it more pragmatically and holistically, allowing the crypto industry to build momentum.