The Markets in Crypto Assets is the EU’s regulatory framework for cryptocurrencies and digital assets. Through it, the European Union aims to centralize regulations governing the issuance and sale of digital assets, including bitcoin and various other cryptocurrencies.
In addition to replacing a patchwork of national crypto regulations, MiCA will also clarify the playing field for companies and organizations providing crypto-related services. MiCA’s rules are comprehensive. They provide regulatory clarity in matters that currently reside in a legal gray area.
MiCA Applies to Crypto Asset Service Providers
Everyone involved in crypto will feel MiCA’s effects in one way or another. The entities directly impacted by its provisions, however, are crypto asset service providers. Currently, such entities operate under the legal umbrella of a motley patchwork of national regulations. MiCA will draw them all under its legal umbrella.
What service providers will MiCA impact directly, and how? How will it impact individual crypto users?
The businesses MiCA is most likely to impact are exchanges that allow users to trade fiat money for cryptocurrencies and one cryptocurrency for another and custodial wallets. Crypto trading platforms and digital asset management organizations should also take steps to MiCA-proof their operations as soon as possible.
What Asset Classes Does MiCA Regulate?
MiCA applies to most digital tokens we would classify as cryptocurrencies and also to some NFTs. MiCA’s coverage also includes asset-referenced tokens or tokens that may enjoy the backing of a commodity or fiat currency and e-money assets, tokens backed by a fiat currency. Utility tokens and stablecoins also fall under the purview of the MiCA framework.
Some NFTs or non-fungible tokens may also fall under MiCA regulation. The framework regulates all fungible tokens, and with NFTs, it establishes fungibility or non-fungibility in interesting ways.
Per the MiCA’s definition, tokens carrying unique identifiers aren’t necessarily non-fungible. Organizations and enterprises issuing large series of non-fungible tokens also require authorization.
Under MiCA, projects that break up NFTs into multiple parts that may be interchangeable require authorization as well.
MiCA will make life more difficult for cryptocurrency service providers and digital asset issuers by saddling them with more obligations and requiring more disclosures. From the perspective of regular cryptocurrency users, this may be a blessing, however. Scammers will no longer be able to operate with impunity, creating artificial pump-and-dump waves and robbing people blind left and right.
At the same time, legitimate crypto projects will need fewer licenses under MiCA.
In theory, MiCA provisions won’t affect DeFi (decentralized finance) projects. Such projects are highly automated and work mostly without intermediaries. How MiCA addresses the DeFi issue may come down to how decentralized projects are. And we don’t yet know how MiCA defines decentralization.
We can reasonably assume, however, that from the perspective of the regulatory framework, decentralization is a political question. How many individuals control projects and how they exert their influence over them are what may determine whether they fall under MiCA’s purview or not.
How MiCA Affects Service Providers and Token Issuers
To launch a crypto project in the EU or to keep an existing project going, organizations must fulfill several new requirements to become MiCA-compliant. Otherwise, after the law goes into full effect by December 2024, they’ll be operating illegally in the European Union.
To become MiCA-compliant, organizations must have a physical office in an EU country and at least a director residing in the same EU country.
Every organization offering crypto services in the EU must implement and observe strict AML measures. They must also follow the MiCA rules on marketing and adopt practices to head off market abuse and handle client complaints. All crypto service providers must warn their users and clients about the risks their transactions entail.
The law will also require crypto service providers to observe transparency-focused practices. In this respect, they must share information about their pricing and the costs their clients will incur through fees and otherwise. Information on the environmental impact of the service provider’s operation must also be publicly available.
Those who want to issue digital asset tokens in the EU will have to jump through additional hoops.
To launch a crypto token, issuers will have to publish the white paper of the project and secure the services of a legal entity that will issue the tokens and oversee their operation according to the rules and policies outlined in the white paper.
The anonymous issuing of digital assets will be legally forbidden in the EU. That includes decentralized token generation events and initial decentralized exchange offerings.
Algorithmic stablecoins use code and algorithms to secure asset parity with a base token. The new MiCA regulations forbid the operation of such algorithmic stablecoins in the EU. Issuers still have the option of creating asset-backed stablecoins. If they want to launch such assets, however, they must comply with many regulatory requirements. One requirement is to back their stablecoins with the asset of their choice, 1:1, through a liquid reserve.
Stablecoin backing will have to comply with many other legal requirements. Stablecoin issuers will have to keep a liquid reserve of assets under the custody of a third party.
MiCA’s Impact on Individuals
MiCA certainly wants to deliver a blow against the privacy of crypto payments, bringing transactions with service providers under its purview. The obligation of service providers to verify the identities of their clients and the source of the funds they handle will be difficult to enforce in the case of hardware wallets.
Some service providers may opt to cut off hardware wallets like Trezor and Ledger from their services. Thus, they may make it impossible for hardware wallet holders to sell their crypto holdings on MiCA-compliant exchanges.
MiCA’s Significance in the Web3 Space
MiCA will finally deliver the legal clarity that allows Web3 companies to operate in compliance. While it may drive some crypto actors out of the EU, it will finally give others a solid set of tools to conduct their operations, handle their marketing, and deal with their clients and users under the law.
MiCA will inevitably serve as a blueprint and inspiration for other regulators around the world who wish to bring the cryptocurrency industry under their local regulatory umbrellas.
Organizations that wish to launch crypto services in the EU or to continue their current operations must take steps to become MiCA-compliant.
They must understand the scope of the legal framework and its possible future ramifications.
At the center of the EU’s attempt to integrate digital assets into the fully centralized traditional financial system, MiCA is a crypto regulation trailblazer many other regulatory agencies around the world will likely emulate.
