EU regulation of the crypto industry: What are the consequences of the MICA Directive?
The term “crypto” is associated by many exclusively with digital currencies such as Bitcoin and associated risks. These include particularly high volatility, hacker attacks, money laundering and corporate bankruptcies, such as that of the crypto exchange Nuri recently. But cryptocurrencies and the underlying blockchain technology - used correctly - also open up completely new opportunities and have the potential to transform the financial and economic world. For example, through fast, cost-effective, international and generally secure financial transactions, the automation of business processes or solutions for the shared economy. Find out what the “Markets in Crypto Assets” legislation includes and what consequences are possible for the crypto industry, finance and consumers.
Like any innovative, disruptive technology, the crypto industry, which strives for liberalism, must also undergo some form of regulation. The European Union has now defined this framework through the so-called MICA regulation, which sets the Body of EU heads of state and government approved on October 5, 2022 has.
Reasons for crypto regulation in the EU
Representatives of the EU Parliament and EU countries agreed back in the summer that the crypto landscape must be regulated. According to France's Finance Minister Bruno Le Maire, who led the negotiations for the member states as EU Council President, the agreement shows that the EU is setting international standards for digital issues. He went on to say that “this groundbreaking legislation is ending the Wild West era in the crypto industry.”
With MiCA, the EU is once again a step ahead and may thus be painting a blueprint for the legal handling of cryptos in the rest of the world. This is because the new law is intended to protect investors, prevent the misuse of cryptocurrencies and at the same time enable innovations in the industry.
Two recent examples show that global regulation would be necessary: Tornado Cash and Nuri. With the Tornado Cash platform, it is possible to disguise the origin of cryptocurrencies such as Bitcoin and Ethereum and thus opens the door to money laundering and illegal transactions. The US Treasury Department believes that approximately seven billion dollars of assets have been laundered since Tornado Cash was founded in 2019. That is why ministers recently banned all Americans from using Tornado Cash and are monitoring all wallets associated with the platform.
An example from Berlin also highlights grievances: The Nuri digital bank advertised with the slogan “High return is history? Not with Nuri's Bitcoin income account. As a result, the value of your bitcoins grows by up to 3% per year. And that all by themselves.” The crux of the matter was that Nuri customers had not signed a contract with the bank for this product, but with the US company Celsius Network, which did not provide deposit insurance for the bitcoins. As many customers reclaimed their deposits as a result of falling crypto prices, Celsius ran out of financial resources - the company stopped all withdrawals and Nuri had to start of August insolvency sign in.
Negative examples like these cast a bad light on the entire crypto industry and undermine the intrinsically positive potential of blockchain. Because — steered in the right direction — the disruptive technology enables a global register that unequivocally assigns ownership and with the help of which values or rights can be transferred in a matter of seconds as needed. Decentralized, tamper-proof and without intermediaries. In addition to the “Internet of Information” that already exists today, the blockchain is intended to create the “Internet of Values” that could change entire industries at a rapid pace.
What does MiCA contain?
The new regulatory framework covers the areas of transparency, disclosure, approval and monitoring of transactions by service providers in the crypto industry. In doing so, the EU regulates with the help of MICA regulation the handling of crypto assets and places requirements on issuers and providers of stablecoins, cryptocurrencies and services.
MICA legislation essentially comprises the following points:
- Authorization requirement for issuers and providers of crypto assets
The core of MiCA is a ban on issuance of crypto assets subject to permission. As a result, crypto assets in the EU can only be issued or offered with appropriate permission from a national supervisory authority. To this end, the issuer must, among other things, prepare an information sheet (comparable to a securities prospectus) and publish it in accordance with applicable requirements.
- EU passporting and approval
In particular, the regulation on EU passporting will be relevant in practice. For cross-border services, it is not necessary to apply for a separate permit in each individual Member State. However, in order to carry out activities in the EU, providers of crypto services need a permit issued by national authorities. The provider must meet the approval requirements at all times, otherwise the permit will be withdrawn by the competent national authority. European VASPs (Virtual Asset Service Providers) must be established within the EU and largely based in the EU with their management. For example, a common requirement is that there is at least one managing director and an office in the member state in which approval is being applied for.
- Stablecoin Hedging
Stablecoins also fall under strict rules so that a drama like that of Collapsed blockchain project Terra LUNA can be prevented in the future. From now on, publishers must have sufficient reserves to fully cover all claims of their users and to be able to pay them out at any time. The reserves must also be fully secured in the event of insolvency.
- Wallet and asset protection
Particularly for transactions that take place outside the EU, the right to protect investors or reimburse losses on the part of users is insufficient. This is now to be improved by making crypto service providers subject to strict requirements to protect investors' wallets and be liable in particular when crypto assets are lost or hacked by investors.
By the way, the area of NFT (Non-Fungible Token) does not fall within the scope of the regulation in principle, unless the relevant NFTs belong to an existing crypto value category. However, the EU is planning to develop an evaluation scheme and a legislative proposal on NFT in the next few years.
The new MICA Directive in its current form is likely to come into force from the fourth quarter of 2022 and must then be implemented in all member states within 18 months.
Implications for the crypto industry, DeFi and consumers
Despite all efforts in the crypto world to be anonymous and unregulated, MICA regulation will be essential to promote innovation, protect investors, and enable large-scale global trading of digital assets.
Because it is only through targeted regulation that the trust of all crypto market players will be strengthened, “black sheep” in the industry will be screened out and the USPs of the blockchain will fully benefit. This includes, for example, that transactions can be carried out quickly, forgery-proof and without the influence of central authorities such as banks, land registry offices or notaries. In this way, any form of trade that is currently supported by intermediaries is migrated to a blockchain platform at drastically lower transaction costs. The same applies to assets or alternative tangible assets, which can be uniquely identified, assigned and stored in a secure framework via the blockchain or can be acted quickly and cost-effectively.
