On 20th April, the European Parliament overwhelmingly approved the Markets in Crypto-Assets (MiCA) regulation. This is part of the European Commission’s multi-pronged approach to regulating digital assets of all kinds. Other related regulations include the DLT [Distributed Ledger Technology] Pilot Regime and the Digital Operational Resilience Act.
What is the MiCA regulation? (summary)
The purpose of the MiCA regulation is to provide clear laws governing crypto-assets, with the stated intention of protecting customers from fraud. Although the majority of crypto exchanges servicing European clients already take sensible steps to do this, from 2024 some specific requirements will become mandatory.
These requirements include the maintenance of ample reserves in case of a ‘run’ on an exchange, and plenty of information for consumers about the risks of using or trading in crypto-assets. For now, art-related NFTs will be largely excluded from the regulation.
Perhaps the most important aspect of MiCA is an associated regulation that requires crypto exchanges to identify private wallet customers: the Transfer of Funds regulation or so-called “travel rule.” Any transfer of more than 1,000 Euros equivalence between an exchange and a private wallet must be recorded and reported.
In theory this undermines two of the original appeals of crypto-assets, especially cryptocurrencies such as Bitcoin: untraceability and anonymity. In practice neither has been entirely true for years, since few crypto-assets are truly anonymous or untraceable.
In any case, decentralised peer-to-peer transfers (i.e. from one private wallet to another) will not be covered by the new regulation, so there’s nothing to stop anybody sending cryptocurrencies directly to another person. It’s only when an exchange gets involved that the regulation takes effect. Of course, this means that any significant conversion of crypto to or from fiat currencies is likely to be tracked and reported.
The MEP leading the MiCA regulation, Stefan Burger, commented that, “the sector damaged by the FTX collapse can regain trust,” although it’s not immediately apparent how that directly relates to MiCA, since accounting fraud and false asset statements can be made regardless of customer transaction records: see the history of the recent Credit Suisse collapse, for example.
The regulation also includes legislation to prevent any stablecoin becoming too big to fail, by limiting transaction volumes ‘as a medium of exchange’ to a quarterly average of 1 million transactions per day and/or a value of 200 million Euros per day. This will also have the effect of preventing such coins becoming too big to compete with the Euro or a CBDC, of course.
In a sense, the MiCA regulation means that crypto exchanges will be regulated in the same way as stock trading platforms. They will be required to identify their customers, to provide suitable warnings about risk, and to report transactions to the financial regulator. They may also be liable for reimbursement of lost client funds in the event of fraud or mismanagement, and they will be responsible for enacting robust anti-money-laundering practices.
On the whole, existing crypto exchanges have greeted the MiCA regulation positively, and the UK seems likely to follow the EU’s lead within the next year or so. This is in contrast to the situation in the US, in which the Securities and Exchange Commission apparently still can’t decide whether or not crypto-assets are securities, nor how they should be regulated if they are.
It’s possible that some existing exchanges may shift their HQs to Europe in 2024 as a result of MiCA coming into force. The CEO of the Coinbase exchange has already hinted that this might be an option. The clear regulatory framework of the EU’s MiCA could be more attractive to exchanges than the muddled and incomplete framework that currently exists in the US and other countries.
Original source: https://www.contextualsolutions.de/blog/mica-eu-regulation
