The European Parliament has approved the Markets in Crypto-Assets Regulation (MiCA), which is the European Union’s crypto-assets framework. This is a significant step because it brings the EU’s 27 members closer to being the first in the world to have a comprehensive crypto law. The enforcement clock will start ticking in June this year, giving 12 to 18 months for the rules to kick in. The rules were agreed upon last summer, and it took this long to clear the 571-page law through the EU’s legal and translation services.
MiCA offers a licence tailored to crypto-asset services and stablecoin issuers that is passport-able across 27 EU member states and 450 million people. It deliberately refrains from regulating decentralized finance (DeFi) or non-fungible token (NFT) activities. It borrows from capital markets regulation – the 2014 Markets in Financial Instruments Directive (MiFID) – but it does not copy it. For example, there are no suitability tests to divide between knowledgeable and non-knowledgeable crypto investors. Rules on stablecoins issuers will give consumers confidence that their tokens are properly reserved and always redeemable.
MiCA is legislation written by competent technocrats who serendipitously timed the negotiations with the bull market and thus captured political interest and optimism that has since vanished in the EU. It is a politically acceptable and workable compromise, building on existing rules frameworks. It was important to get it done now that the market is mature enough and profitability pressures are testing governance and risk management. It gives entrepreneurs certainty and it stops policymakers from a knee-jerk reaction to an industry issue.
By choosing to rely on available regulatory frameworks, the Commission set MiCA to regulate token issuers as entities, not token exchanges as activities. That is, the requirements are on the issuer, regardless of how its token is used. This, however, limits how future-proof MiCA is. Over the past decade, the mantra for authorities from Europe to Asia has been to adapt to the unbundling of financial services by creating activity-based, not entity-based, regulation. Issuing tokens as bearer instruments makes this impossible – the issuer is not in charge of determining whether their token is used to pay or to invest.
The EU squared this circle by focusing on probabilities. It said that a token pegged to a currency is more likely to be used for payments than anything else, so it should follow that regulatory framework. In EU language, this is an e-money token (EMT), a token that fluctuates freely is more like an investment, and is regulated as such. The rules on these assets are complicated and opaque in their attempt to address both the payments and the investment use case. This points to how crypto complicates the normal payment versus investment distinction. MiCA Level 2 technical rules will seek to draw a clearer line, but it will be difficult.
For international companies, the key question is when and how the global crypto order will be established. Regulators are asking themselves the same. For a market as digitally accessible as crypto, there are very few rules in Europe that can protect EU citizens from subpar services offered from abroad. This would be particularly true if a non-European exchange chooses to offer a hyped-up token and Europeans flock to it without solicitation. The international framework is being established by the Financial Stability Board, and will have to be rolled out by the G-20 members. Because MiCA came first, the EU is very keen that the FSB aligns. Learning a lesson from the FTX scandal, the EU will likely be very cautious about allowing non-European exchanges to offer services to EU citizens.
In conclusion, the approval of MiCA is a significant step towards comprehensive crypto law in the EU. It offers a licence tailored to crypto-asset services and stablecoin issuers that is passport-able across 27 EU member states and 450 million people. MiCA is a politically acceptable and workable compromise, building on existing rules frameworks. However, the EU will need to be cautious about allowing non-European exchanges to offer services to EU citizens.
