What is MiCA and what is the crypto regulation governing the market in the Eurozone? Read the full guide
What is MiCA (Markets in Crypto Assets) and what does the European regulation that will regulate the cryptocurrency market in the Eurozone mean? The main aims of this regulatory package, which has already been approved by the Council and the European Commission, are to ensure investor protection and to prevent money laundering. The regulation also lays the foundation for future innovations, such as the establishment of a European cryptocurrency. So find out in detail what MiCA is, what the crypto regulation really provides for, and what will change in the industry thanks to it?
MiCA crypto regulation: what it is and what it stipulates
The MiCA is the first EU regulation governing the cryptocurrency sector. Its articles will regulate both centralised exchanges, stablecoins and the entities that issue them. DeFi, on the other hand, does not fall under the MiCA framework, nor do NFTs. The discourse on non-fungible tokens, however, is not yet closed, and further guidance may be forthcoming. For now, it seems that it will be left to individual countries to decide whether to consider NFTs as crypto-assets or not.
The plenary vote to finally approve the regulatory document, which is expected to take place in the week of 17-21 April, will be in the hands of the European Parliament. If the MiCA is finally approved, EU countries will have 18 months to amend their domestic legislation accordingly.
In order to fully understand not only what the MiCA is but also what it provides for, let us see what topics are covered by its articles and how.
What changes with the new European crypto regulations?
Now that you know what MiCA is, it is time to better understand what it provides for and how it will change the European situation after its entry into force. The regulation represents a real revolution for the European cryptocurrency market as it introduces common regulations for all EU countries.
The first major change that catches the eye is the obligation for operators in the sector to register with the competent authorities of the countries in which they operate. The harmonisation of regulations in the various Member States will probably make it possible to protect users more effectively and prosecute criminals more easily.
So let’s find out what MiCA is through the main points that are covered within it.
MiCA: what it means for stablecoins
The MiCA provides for specific regulations for stablecoins. This type of cryptocurrency will be divided by the European legislation into two categories: ‘electronic money tokens’ (EMTs) and ‘asset-referenced tokens’ (ARTs). EMTs, according to the European Commission, are cryptocurrencies with characteristics similar to the ‘digital coins’ we use daily for payments. It is not clear what this expression refers to, according to experts it could include CBDCs (digital coins issued by central banks) which will be subject to the rules applicable to payment services of the country in which they are issued. ARTs, on the other hand, are tokens that aim to “maintain a stable value by reference to any other asset or a combination thereof, including one or more official currencies”. Thus, the most famous stablecoins such as USDT or PAXG belong to this group; cryptocurrencies whose price is pegged to that of physical assets, such as fiat currencies or gold.
According to the new laws, moreover, European institutions issuing stablecoins will have to hold protected and liquid reserves in a 1:1 ratio. Supervising the reserves will be the EBA (European Banking Authority). MiCA, however, does not explain what will happen to algorithmic stablecoins, which are known to be anchored not with physical reserves but with complex mathematical formulas.
MiCA: what does it provide for utility tokens?
The MiCA defines cryptos that are neither EMT nor ART as utility tokens. Companies that issue this type of token are required to draw up a specific document, the White paper, to be published on the website owned by the organisation issuing the cryptocurrency.
This document should contain all fundamental information about the token, such as: a detailed description of the project, how the crypto will be issued and sold, and the technologies on which it is based.
MiCA: what it provides for exchanges
To answer the question what the MiCA is, we cannot leave out the articles that will regulate exchanges, i.e. platforms that allow the purchase, sale and swap of cryptocurrencies. First of all, centralised exchanges and platforms providing this type of service, defined by the MiCA as ‘crypto-asset service providers’ (CASP), will have to be registered with the competent authority of the country in which they operate.
The new framework will also hold CASPs directly liable in case of bugs, exploits or insolvency. This will ensure that users are compensated if part of the platforms’ capital is lost. Furthermore, CASPs will have to keep a history of all transactions processed on their platform for at least five years.
As far as anti-money laundering is concerned, monitoring and enforcement will be entrusted to the EBA (European Banking Authority). The body will also have a register of companies that are not allowed to conduct CASP activities in the EU, which it will use to limit the entry of organisations considered to be at ‘high risk’ of money laundering.
In addition, all companies dealing with Proof-of-Work crypto-assets will have to regularly submit documents proving their environmental impact. MiCA will not ban PoW cryptocurrencies, but will limit their spread by cutting public incentives directed towards this type of technology. Bitcoin is therefore safe, and will not be banned by the new European crypto law.
Exchange wallets and private wallets: what changes with MiCA?
Also with regard to the regulation of crypto wallets, European laws aim to protect users. P2P payments between individuals via cryptocurrency will not be affected. Exchanging crypto from one centralised exchange to another, on the other hand, may become more cumbersome, as it appears that controls will be increased for these transactions.
Finally, MiCA will also deal with the impact of crypto influencers, those who express personal opinions on certain cryptocurrencies by recommending them to their followers on social networks. The bill provides for penalties for those who do not behave transparently: expressing opinions on a particular asset without disclosing their exposure.
The current regulatory environment of cryptocurrencies
To date, the European regulatory situation on crypto is highly fragmented and evolving. Each country has adopted its own laws, making regulatory harmonisation difficult. France, for instance, has regulations for ICOs (Initial Coin Offering), whereas Germany has classified crypto as digital currencies and subjected them to specific taxation some time ago. Italy has also introduced taxation of cryptocurrencies within the last budget law.
Some opinions from the industry
Crypto enthusiasts have known what the MiCA is and what it means for crypto for several months. The first draft of the document was in fact drafted in 2020, so they have had plenty of time to get their minds around this regulation. According to some experts, MiCA will have a positive impact on the industry. The consumer protection provided by the new framework serves to make the crypto world more accessible. In addition, the new rules prevent suspicious or questionable companies from entering the European market, reducing the risk of scams or rug pulls. According to Dante Disparte, Circle‘s Head of Global Policy, the laws will serve to transform the European Union into a competitive and innovative crypto terrain.
On the other hand, critics think that these new European laws could have negative effects on the market. Mainly because some transactions that, as of today, are carried out immediately, such as transactions between exchange wallets and withdrawals of large amounts of crypto, could become complicated. Critics therefore believe that this will slow down the adoption of cryptocurrencies.
In general, however, the opinions of members of the crypto community who have long known what MiCA is and what it means are positive. After all, most of the pioneers in the field (such as Charles Hoskinson and Andre Cronje) have always been in favour of cryptocurrency regulation.
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