The European Union is outpacing the unfocused US in crypto regulation, but MiCA Article 68 raises concerns
As the EU takes the lead in addressing the complex regulatory landscape for cryptocurrencies and blockchain technology, striking a balance between innovation, privacy and compliance becomes more critical. The Markets in Crypto-Assets Regulation proposed in December 2020 and expected to be published in the EU Official Journal this summer is a notable example of the EU’s evolving approach to crypto regulation. The provisions of the MiCA relating to stablecoins are expected to enter into force at the end of June 2024, while those affecting crypto-asset service providers are likely to be implemented by the end of December 2024.
This approach contrasts with the regulation-by-enforcement style prevalent in the United States and certain other jurisdictions. Recent events in the US, including the shutdown of Signature Bank and US Securities and Exchange Commission lawsuits against Genesis, Gemini, and now Bittrex, have heightened concerns regarding innovation and capital flight within the country’s cryptocurrency sector.
Crypto exchange Coinbase has now called on the SEC to establish rules for crypto, filing a request on April 24, 2023 with the Third Circuit Court of Appeals to compel a response and “break the illegal logjam.” After nine months of silence from the SEC since a petition in July, Coinbase is now seeking a definitive answer from the SEC regarding a framework for crypto.
In contrast, the EU has worked hard to create regulations that protect consumers and encourage innovation in the crypto space. Spanning hundreds of pages, MiCA establishes a comprehensive regulatory framework for cryptoassets, focusing on disclosure and consumer protection. As a directly applicable regulation across the EU’s 27 member states, together with Norway, Iceland and Liechtenstein, MiCA establishes a uniform approach.
MiCA focuses on consumer and investor protection, with measures to increase regulatory oversight to balance the traditional industry and the crypto-asset industry. The regulation’s ultimate goal is to build confidence in cryptoassets among consumers and financial institutions. As a result, MiCA has the potential to encourage more widespread use of cryptoassets and the distributed ledger and blockchain technologies that underpin them. With its impact expected to extend far beyond the borders of the EU, MiCA is likely to serve as a model for other jurisdictions as they develop their regulatory frameworks for the rapidly evolving crypto landscape.
However, the US still finds itself in regulatory disarray, struggling to navigate the crypto landscape. As the EU pursues a more balanced approach, the US contends with various governing bodies vying for dominance and presenting conflicting views and policies, further underscoring the importance of the EU’s commitment to a harmonious and pragmatic cryptoregulatory framework.
The MiCA regulation aims to bring crypto-assets and related services under the EU’s existing legal framework, offer legal certainty to the crypto industry and include investor protection and anti-money laundering measures. However, some critics (including this author) argue that certain language, particularly Article 68, is highly restrictive, potentially limiting the blockchain industry’s growth and innovation.
Article 68 of the MiCA deals with the rules for operating a trading platform for cryptoassets. It requires trading platforms to prevent trading of cryptoassets with built-in anonymization unless the owners of the assets and their transaction history can be identified by authorized CASPs. This provision can have far-reaching consequences for individuals, companies and local communities.
Privacy is a cornerstone of human rights, enabling individuals to communicate freely and securely without fear of surveillance or reprisal. Privacy is essential for financial transactions to protect sensitive information from hackers, competitors and malicious actors. Restrictions in MiCA Article 68 may, however, endanger the stakeholders’ privacy and security.
As the EU moves forward with the implementation of MiCA, the European Banking Authority and the European Securities and Markets Authority will play key roles in shaping the future of the crypto landscape. They will be responsible for finalizing various regulatory technical standards, or “level two text”, and guidelines prior to full implementation of MiCA rules. This collaboration between the EBA and ESMA will ensure a more comprehensive and unified approach to crypto regulation, extending beyond just countering illegal activities and addressing other aspects such as anti-money laundering.
Addressing these concerns requires a more flexible and dynamic regulatory approach – one that promotes the continued growth and innovation of the blockchain industry while ensuring compliance with regulatory requirements and protecting privacy and security. Regulators must avoid a one-size-fits-all approach and instead consider alternative options that strike a balance between innovation and compliance.
Such an approach could involve allowing CASPs to continue to facilitate confidential transactions while ensuring compliance with regulatory requirements. Rather than prescribing specific technical solutions, regulators should give regulated intermediaries flexibility to develop their own risk-based solutions. These solutions balance compliance with innovation and privacy.
In addition, EU regulators can work with industry stakeholders to develop regulatory and technical standards that provide more guidance for the implementation of MiCA Article 68. This approach will involve open dialogue and input from industry leaders and experts. This will enable regulators to better understand the potential implications of regulation on the blockchain industry and the privacy and security of individuals, businesses and communities.
The US, with its patchwork of regulations and lack of a unified strategy, serves as a warning. As the EU moves forward with the MiCA regulation, it can avoid the quagmire of other jurisdictions and prioritize a coherent and adaptable regulatory stance.
Finding a solution to MiCA Article 68 challenges requires coordination and collaboration between regulators, industry experts and stakeholders. By considering alternative compliance options, developing regulatory and technical standards, and engaging with the blockchain community, MiCA Article 68 can be implemented in a way that promotes growth and innovation in the blockchain industry while protecting the privacy and security of all stakeholders.
In addition, MiCA establishes uniform requirements for the offering and marketing of most crypto-assets, as well as comprehensive compliance requirements for CASPs operating within the EU. These compliance requirements aim to increase transparency, minimize market contagion and reduce user risk. With the ability for CASPs registered in one EU member state to “passport” their services across Europe without requiring approval from regulators in all twenty-seven member states, the EU is positioning itself as a leader in crypto-asset innovation.
As MiCA’s influence extends far beyond the EU’s borders, other countries can look to the comprehensive regulation as a model for developing their frameworks. By providing market players with clear rules and expectations, MiCA enables a level playing field for innovation while ensuring consumer protection and market integrity. The EU’s balanced and flexible approach to crypto-asset regulation could serve as a valuable example for the US as it works to move beyond its current regulatory disarray and establish a more coherent and effective framework for the rapidly evolving crypto sector.
The different approaches that the EU and the US have taken to regulate the crypto sector highlight the challenges of reaching a consensus on effectively governing a rapidly evolving technology. As the EU embarks on the implementation of the MiCA regulation, it must be alert to potential pitfalls that have befallen the US. By embracing a balanced and adaptable strategy, the EU is well positioned to become a global leader in promoting innovation in the crypto space.
Dissemination: I am an employee of Electric Coin Co., a company dedicated to advancing secure transaction technology in the crypto industry, and a long-term holder of ZEC tokens. The views and opinions expressed in this article are my own and do not necessarily reflect the official policy or position of Electric Coin Co. This article is for informational purposes only and should not be construed as legal or financial advice.
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