In late June 2022, European Union officials managed to agree on an interim version of the Markets in Crypto Assets (MiCA) framework. The third-largest economy in the world has produced part of the European regulation of cryptocurrencies, a milestone in the recognition of the legitimacy of cryptocurrency and cryptocurrency investments. Its implications have been explored in this Learn Crypto article: “What is the threat of regulation for cryptocurrencies?”.
In October 2022, the European Union (EU) agreed to the full text of this MiCA legislation, including an additional law that would specify identification processes for those using cryptocurrencies to make payments. That’s what this article is about.
What happens before the approval by the European Parliament
Of course he won’t come in yet. In other words, the regulation still requires the approval of the Council and the EU Parliament. Following that approval, if granted, there will be a grace period before it takes effect in 2024.
Such regulatory approaches are also likely to influence changes in other countries or regions. Interestingly, MiCA’s draft text has a heavy focus on stablecoins, which seems like a logical step after the Earth/Moon market crash and the Tether crash. The implications of the rapid change in EU cryptocurrency regulation are related to the likelihood that European-style cryptocurrency regulation will be exported globally without verifying that there is a one size fits all. On the other hand, after the stablecoin crash, it was clear that special safeguards had to be put in place to protect investors and users.
The EU may be the first to jump on the regulatory bandwagon, but others are trying to catch up. The International Monetary Fund has released its Global Financial Stability Report calling on cryptocurrencies to put global financial stability at risk. The IMF has highlighted the threats of cryptocurrencies to national currencies, capital flows, money laundering risks and banking intermediation. The latter refers to one of the biggest benefits of cryptocurrencies, namely the removal of the middleman from the financial picture. Another major economy has not rested either. In March 2022, Joe Biden issued an executive order to ensure the responsible development of digital assets and then asked federal agencies to report on the cryptocurrency industry, especially consumer/investor protection, financial stability, illegal activities , on innovation, competitiveness and financial inclusion. It is clear that all major economies have moved in the same regulatory direction.
Before explaining the new cryptographic regulation, we need to look at the interplay between crypto and regulation in general. The cryptocurrency community has widely viewed cryptocurrency-specific regulations as a threat. The core values behind cryptocurrencies are namely decentralization, transparency and sovereignty. Traditional financial institutions have been subject to political whims for years, and cryptographic technology has offered a viable alternative, offering to cut out the middlemen and allow users to regain control of their money and data. In the eyes of regulators, cryptocurrencies are seen as a tool to create financial instability and illegal activities such as fraud and money laundering. The question arises whether regulation could lead to the loss of the core values of cryptocurrencies and stimulate movement towards a level playing field.
Before the stablecoin crisis, states mainly focused on the environmental aspects of cryptocurrencies. The promulgated versions of the regulations around the world depend on the severity of the threat cryptocurrencies pose to major economies in terms of how much monetary sovereignty countries can gain and their position in the crypto environment. Now let’s move on to MiCA. In this text, you will learn about the main features of EU crypto regulation and the emphasis of stablecoin legislation. More importantly, we discuss how it affects the industry in Europe and cryptocurrency users as individuals.
There is no simple answer to what a MiCA is; MiCA is a broad piece of legislation born in response to the question of what should have been done to avoid most of the legal problems caused by stablecoins. While some sections refer indirectly to the case of the Tether scam, the regulation is mostly about simply “regulating” i.e. creating new providers.
Main features of MiCA
Contrary to the International Monetary Fund’s report on how cryptocurrencies are bringing the entire global economic situation into play, EU officials believe there is no need to panic just yet. As noted, the cryptocurrency market is still modest and therefore currently poses no threat to financial stability. However, leaving the sector unregulated or partially regulated could hinder the development of the cryptocurrency market and expose holders of digital assets to a number of risks not covered by EU consumer protection rules.
Reasons and objectives behind the new regulatory framework: cryptoasset service providers at stake
The new cryptocurrency legislative proposal was developed to introduce distributed ledger technology and regulation of digital assets in the EU, while protecting investors and users. As mentioned above, the first licensing system for cryptocurrency exchanges and wallets was born which included several requirements related to stablecoins and stablecoin inventory to avoid market crashes. The 168-page document presented a strong focus on cryptoasset types such as stablecoins and cryptoasset service providers.
As stated in the document itself, it was necessary to create a clear and transparent framework to allow cryptocurrency service providers to expand their business and conduct normal commercial and cross-border activities. Regulations must be able to provide equal opportunities in terms of market access, financial stability, secure payment system and reduction of monetary policy risks.
The new rules could be burdensome for many cryptocurrency issuers or service providers, as they impose multiple obligations, liability rules, and requirements for drafting a variety of legal documents and enforcement procedures. However, the main purpose of the regulations is reflected in the need to increase the adoption of crypto products while reducing the monetary risks that we have faced in the past.