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The Markets in Crypto-Assets Regulation (MiCA) has been approved by the European Parliament today, marking a significant milestone in the European Union's crypto-assets framework.

The vote's outcome was unsurprising, rendering it a non-event. However, it holds significant importance as it brings the European Union's 27 member states closer to becoming the first in the world to implement a comprehensive cryptocurrency law. With only a few administrative steps remaining, the enforcement timeline will commence in June of this year, allowing for a 12 to 18 month period for the regulations to take effect.

Forefront Advisers' Head of Digital Assets is Dea Markova, who also serves as a Managing Director.

To clarify, the regulations were approved last summer. The reason for the delay was simply the time required to navigate the EU's legal and translation services to finalize the 571-page legislation. Despite rumors and conspiracy theories suggesting otherwise, there was no hidden agenda behind the delay.

Legal and compliance teams need to carefully examine the final text to ensure that the details they recorded last year when the text was agreed upon politically have not been altered under the scrutiny of the legal services. However, any modifications are expected to be minor.

Is MiCA the optimal regulatory framework available?

The market's optimism towards regulation is at an all-time high. Despite economic fluctuations, aggressive regulatory actions in the United States, and workforce reductions, the centralized crypto market has embraced MiCA with open arms. This legislation provides a specialized license for both crypto-asset services and stablecoin issuers, which is recognized and valid across 27 EU member states and a population of 450 million individuals.

MiCA intentionally avoids regulating decentralized finance (DeFi) and non-fungible token (NFT) activities. The legislation takes inspiration from capital markets regulation, specifically the 2014 Markets in Financial Instruments Directive (MiFID), but it does not simply replicate it. Notably, there are no suitability tests to differentiate between informed and uninformed crypto investors. Rules regarding stablecoin issuers aim to provide assurance to consumers that their tokens are backed by proper reserves and are always redeemable.

At present, Banks, custodians, and asset managers are cautious about the potential reputational harm that may arise from engaging with cryptocurrency. However, MiCA has the potential to enhance institutional confidence in crypto as a legitimate asset class.

MiCA is a piece of legislation crafted by proficient technocrats who were fortunate enough to have timed their negotiations with the bull market, thereby garnering political attention and enthusiasm that has since dissipated within the EU.

In my view, MiCA represents a viable and politically feasible compromise that leverages existing regulatory frameworks. With the market reaching maturity and profit-driven pressures putting governance and risk management to the test, it was crucial to establish this legislation. MiCA offers entrepreneurs a sense of certainty while preventing policymakers from making a knee-jerk response to issues within the industry.

One key weakness

The Commission's decision to rely solely on existing regulatory frameworks led to the establishment of MiCA, which aims to regulate token issuers as entities rather than token exchanges as activities. This means that the requirements apply to the issuer, regardless of the token's intended use. In my opinion, this approach may restrict the future-proofing of MiCA.

These terms will be familiar to regulatory professionals, as they have been in use for quite some time. In the last ten years, regulatory authorities across Europe and Asia have been adapting to the unbundling of financial services by implementing activity-based regulation, rather than entity-based regulation. For instance, rather than solely regulating banks as a type of entity, the focus has shifted towards regulating specific activities such as buy-now-pay-later.

The issuance of tokens as bearer instruments presents a significant challenge because the issuer has limited control, if any, over how their token is utilized - specifically, whether it is used for investment or payment purposes.

The EU resolved this dilemma by emphasizing the importance of probabilities. It argued that tokens linked to a specific currency are highly probable to be utilized for payments, and therefore should be governed by the corresponding regulatory framework. This type of token is called an e-money token (EMT). Conversely, tokens with fluctuating values are more akin to investments, and are subject to regulation accordingly.

Significant political efforts were directed towards tokens linked to a diversified pool of currencies, commodities, or other assets. This initiative, pursued by Europe, appeared to be a response to the failed attempt by Facebook's Libra stablecoin project, albeit belatedly. In the meantime, the market had already shifted its focus elsewhere. The regulations governing these tokens are convoluted and obscure, attempting to cater to both payment and investment purposes.

This highlights the challenges that cryptocurrencies present in distinguishing between conventional payment and investment activities. The Level 2 technical regulations under MiCA aim to mitigate this issue, but defining a clear boundary may prove to be an arduous task. Among the 20 technical standards that will be developed for MiCA, this could potentially be one of the most intricate.

It is possible that by establishing a robust legal framework, the EU could shape the market dynamics envisioned in the legislation, such as the intended purpose of a given token - whether it is designed for payment or investment.

EMTs share similar market functionalities with e-money, but their underlying technology is akin to other types of tokens. The EU has exhibited an inconsistent stance on technology neutrality, whereby EMTs are subject to distinct anti-money laundering measures due to their technological architecture. However, in June, the Commission is expected to propose that EMTs should afford consumers with the same safeguards as e-money, such as reversible payments, regardless of their underlying technology.

Can MiCA serve as a model for global regulatory frameworks?

International firms are grappling with the critical question of when and in what form a global regulatory framework for cryptocurrencies will emerge.

Regulators are also grappling with similar concerns. Given the digital nature of the crypto market, there are scant regulations in Europe that can safeguard EU citizens from substandard services offered by foreign entities. This is especially concerning if a non-European exchange decides to market a highly-publicized token, such as Terra's luna, which experienced a dramatic decline last summer, and Europeans purchase it without solicitation.

The Financial Stability Board is spearheading the establishment of a global regulatory framework for cryptocurrencies, which will require buy-in from G-20 members. As the MiCA regulation was introduced first, the EU is eager to ensure that the FSB aligns with its approach. Drawing lessons from the FTX controversy, the FSB may adopt a more stringent stance on commingling of activities and funds. Concurrently, the UK, which has left the EU, is devising its own rules for stablecoins and crypto-asset services, resembling the MiCA framework.

To sum up, Europe has a promising opportunity to export the MiCA regulatory framework, albeit with a delay. However, during this period of time lag and the prevailing bear market, companies may be exposed to capricious regulators, while consumers may be susceptible to unreliable businesses.

Source Coindesk