What is MiCA?
The Markets in Crypto-Assets regulation, or MiCA, is a broad set of regulations proposed by the European Commission in September 2020, which aim to protect consumers and ensure that access to crypto markets is harmonised across the single market of the European Union. Designed to be an umbrella legal framework that sits above national regulation, MiCA encompasses assets not covered by existing financial services legislation. Safeguarding (via appropriate risk management) and financial stability are key priorities, as is supporting innovation and fair competition.
What Regulation Means For Crypto Across Europe
While MiCA has been in the pipeline for a number of years, a series of high-profile collapses in the crypto industry over the past few months has confirmed that regulation is well overdue in order to better protect consumers from unscrupulous high-risk crypto providers that don’t have their best interests at heart. The implosion of Terra Luna is just one example which showed that there are still substantial risks for individuals who don’t do their own due diligence when investing into certain crypto asset service providers (CASPs), and it once again highlighted that it’s difficult to create a completely safe environment, as the crypto industry is still fragmented in nature.
Building on current AML regulations, MiCA presents an opportunity for the EU to bring both crypto assets and service providers under a comprehensive regulatory framework for the first time. It will hold crypto providers liable for any assets that are lost or stolen, and ensure that everyone acts fairly by punishing those found to be manipulating markets. Under the regulatory framework of MiCA, algorithmic stablecoins will likely be outlawed, and the remaining stablecoin issuers will now need to have sufficient liquidity reserves to account for transactional demands. Finally, there will be a raft of measures implemented to make sure that CASPs are more co-operative and transparent with their respective national governments.
The Limitations of MiCA
On paper, this regulatory framework sounds great; consumers are to be better protected and crypto providers will now operate under blanket governance which ensures that minimum standards and ethics are met. However, questions have arisen on how MiCA will be effectively enforced by EU regulators. The very nature of the crypto industry means that it is constantly evolving and, as a result, any regulation will sit firmly behind the curve of progress. This poses a constant game of cat-and-mouse for the regulators. José Manuel Campa, chair of the European Banking Authority, has already voiced concerns that his organisation — responsible for maintaining a public register of non-compliant crypto-asset service providers — will not be ready for the completely different landscape when MiCA comes into effect; especially as there are currently more than 20,000 cryptocurrencies in existence with that figure continuing to grow.
The EBA’s more immediate concern, however, is that there isn’t enough talent with the required skill sets to police under the new guidelines. Campa highlights the issue is “particularly in the areas of technology, anything related to crypto, digitisation or artificial intelligence. This is in high demand across society.”
The Future of Regulation in the Crypto Industry
The challenge with regulation within the crypto industry going forward will be deciding who has jurisdiction over particular crypto activities. The current framework from MiCA doesn't explicitly cover a number of crypto activities, including NFTs and crypto lending. Instead, these activities will still fall under national legislation or, in the case of NFTs, assessed on a provider-by-provider basis. Additionally, while MiCA does well in categorising stablecoins under “asset-referenced tokens” and “e-money tokens”, it doesn’t do so well in defining other categories of crypto assets, which further muddies the waters as to what constitutes a security or a crypto-asset. While the role and effectiveness of MiCA will be reviewed annually, which may see a reclassification of different assets, we should not expect to see a rollout of a MiCa v2 at least for a few more years. The best we can hope for is efficient and suitable annual revisions of crypto regulations.
Self-Governance Still Has a Place in the Crypto Industry
While the effectiveness of MiCA is already under scrutiny, it does offer crypto providers insight into what regulatory guidelines may look like going forward. It will be a watershed moment, and for the majority of good actors in the crypto industry, regulation will serve to increase the level of trust and transparency between CASPs and both their institutional and retail customers. Those crypto providers that are already operating transparently and fairly will benefit from, rather than be disrupted by, the regulatory overhaul of the crypto market.
There are plenty of good practices that can be implemented right now to future-proof against incoming regulation, some of which can be borrowed from traditional finance. Developing a robust collateral risk management strategy for the lending business and ensuring open dialogue and compliance with regulators should be actively encouraged amongst CASPs is a real benefit to be had by ensuring that any activity in the crypto industry is conducted transparently.
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