The law, which was agreed upon by Parliament and Council negotiators back in June 2022, seeks to ensure that crypto transactions, just like traditional finance transactions, can be traced and suspicious activity can be blocked. This new “travel rule,” which will apply to crypto asset transfers, will ensure that relevant information pertaining to the source and beneficiary of said assets accompany the transaction and is kept by both parties involved in the transfer. But what does it mean for crypto markets? Read on!
Under the law, transactions involving a self-hosted wallet (i.e., an address owned by an individual) and a hosted wallet (managed by a crypto-assets service provider) exceeding €1000 must adhere to the rules set out. However, these rules do not apply to personal exchanges between providers or between private persons.
The European Parliament gave its final approval, with a decisive 517 votes for, 38 against, and 18 abstentions, for the introduction of new common rules on supervision, consumer protection, and environmental safeguards for crypto-assets, such as crypto-currencies (MiCA). This draft legislation informally agreed upon with the Council back in June 2022, will help ensure the prevention of market manipulation and financial crime.
MiCA will ensure the safety and security of crypto-assets that aren’t subject to existing financial services legislation. These crucial regulations will guarantee transparency, disclosure, authorization, and supervision of crypto-asset trading and issuance, including asset-reference tokens and e-money tokens.
Consumers will benefit from greater awareness of associated risks, fees, and charges. Moreover, the fresh legislation will help maintain market integrity and financial balance by governing public offerings of crypto-assets.
The MiCA overlooks one of the more advanced organizational and technological forms in the crypto space – decentralized finance (DeFi). Omitting it from the current draft could prove to be a challenge once MiCA is rolled out.
Oliver Linch, CEO of Bittrex Global, is convinced that there is a universal concern over DeFi regulation, and MiCA won’t be any different. He emphasizes that DeFi is, in essence, not regulatable, and for many regulators, not a major priority either since most users primarily trade through centralized exchanges.
The attention-grabbing DeFi sector may have taken the spotlight; however, it is not the only limitation to the upcoming MiCA – the EU framework neglects to take into account the growing crypto lending and staking sector. With the misfortunes of loan providers such as Celsius, and increased scrutiny of staking from US regulators, EU legislators must develop an effective response to these issues.
Additional elements of MiCA
Financial services firms are taking major strides to adhere to the newly proposed environmental disclosure requirements, as MiCA places cryptocurrency businesses under the microscope to account for their environmental and climate impacts. Through public whitepapers, each crypto-asset service provider (CASP) is required to specify the type of blockchain consensus mechanism they use in order for European Securities and Markets Authority (ESMA) to determine precisely what type of disclosures should be made.
MiCA also aims to address certain practices observed in the market of CASPs. Some of the practices that the framework would tackle include front running, insider trading, and wash trading.
Front running is the act of taking advantage of knowledge of an upcoming trade to profit from resulting price movements. MiCA would address this issue through specific measures.
Another issue that MiCA would address is insider trading. This practice is a concern among investors in CASPs, and MiCA proposes that CASPs disclose inside information regarding their organization and tokens as soon as possible. The disclosure should be done in a manner that ensures broad and swift dissemination among the public.
Wash trading is a common concern in the crypto-asset market. It involves executing a transaction in which the seller is on both sides of the trade, creating a misleading impression of an asset’s value and liquidity. MiCA proposes that CASPs adopt full transparency and implement surveillance and enforcement mechanisms to prevent potential market abuse.
To maintain their credibility, CASPs will have to have a management team that possesses the necessary knowledge, experience, and skills, along with a good reputation. CASPs must also establish policies and arrangements to comply effectively with these requirements. Any changes in the management body’s composition must be reported to the authorizing regulator without delay, before undertaking any new activity. Additionally, CASPs must establish transparent and effective procedures to handle client complaints, and ESMA is currently developing standards, formats, and timeframes for these procedures.
MiCA incorporates a change in control regime applicable to crypto-asset service providers and issuers of asset-referenced tokens. The regime is similar to that of other financial institutions authorized in EU member states, such as investment firms, credit institutions, e-money institutions, and payment institutions.
In essence, any acquisition, whether direct or indirect, of over 10% of the shares or voting rights in a crypto-asset service provider or an issuer of asset-referenced tokens necessitates prior approval from the competent authority in its EU member state of origin.
And what about Stablecoins?
Policymakers have been closely monitoring stablecoins, which are primarily used for payments. These coins have gained significant attention due to their rapid growth, widespread use, and critical role in the broader crypto ecosystem. Should a large stablecoin fail, it could have significant implications for the entire crypto market.
In response to these concerns, European regulators are imposing strict requirements to mitigate risks to consumer protection and market integrity. To obtain a MiCA license, stablecoin issuers must meet specific conditions. These include having a registered office in the EU, building up a sufficiently liquid reserve with a 1/1 ratio and partly in deposits, and offering every stablecoin holder a free claim at any time. Rules governing this reserve must provide adequate minimum liquidity. The European Banking Authority (EBA) will supervise issuers of stablecoins.
The MiCA Act has the potential to revolutionize the global crypto asset market. With clear, comprehensive regulations in place, European investors and businesses can approach the market with greater trust. As other countries may follow suit, the focus on protecting investors, preserving market integrity and stabilizing finance should combat fraud and other unlawful activities within the crypto asset space. But, of course, there may be difficulties when the MiCA Act is put into action. Therefore, close observation of the regulation’s impact on the market is key, so that any necessary modifications can be made and the desired outcomes achieved.
The MiCA Act and existing regulations, such as the Capital Markets Act, exist in parallel. While the MiCA Act offers a full scope of crypto asset regulation, this should not be used as an excuse to ignore past unlawful activities. By utilizing existing regulations alongside the MiCA Act, policymakers can ensure that the crypto asset market is regulated efficiently and equitably.
Adopting the MiCA Act is a considerable achievement in the crypto asset market’s advancement. Its clear and thorough regulations have the potential to eliminate regulatory uncertainty and stimulate market growth. Though there may be difficulties and complications, the emphasis on investor protection, market integrity, and financial stability is a beneficial development that will benefit the entire industry.