The MiCA Framework: Europe’s Proposal for Crypto Regulations

15.07.2022

The European Commission had previously released its proposed set of rules for Markets in Crypto-Assets (or MicA), which is expected to simplify crypto-related regulations.

There is known around the globe that there is a considerable gap in our current financial regulations, specifically on how many crypto-related activities are not covered by the existing legacy restrictions. Europe and other countries worldwide have been exerting efforts to fill these gaps. With this goal in mind, the E.U. Union has recently released its proposed restriction framework for MiCA or Markets in Crypto-Assets.

The suggested European regulation on Markets in Crypto Assets, or MiCA, was previously discussed in the country’s Committee on Economic and Monetary Affairs. MiCA is essentially a set of existing European laws, amplified for crypto-assets and amended for consistency and proportionality. This framework objectifies manufacturing a mechanism that grants an innovative market while addressing risks that new technologies present and warranting a proposition consistent across markets.

The MiCA Framework: Europe's Proposal for Crypto RegulationsThe MiCA project is just a part of the many strategies created to ensure that the European financial industry will adapt to the growing virtual space. This proposal mainly discusses stablecoins which it subcategorizes as “asset-referenced tokens.”

Unlike USDC and USDT, which are only backed by the U.S. dollar, these tokens are built on the foundation of multiple fiat currencies or blockchain assets.

With MiCA, once a blockchain business is given a license in any of the 27 European states, it will be applicable in all other states, meaning the firm could do its venture without additional local approvals. With this, rapid growth for crypto businesses is expected to be vastly simplified.

However, many experts have noted how the MiCA regulations are different from other countries.

For example, although the United States of America has built multiple crypto-related laws in the past years, it has no identifiable one which matches MiCA. On the other hand, the Chinese government has recently banned crypto activities while creating its own central bank digital currency (CBDC).

The European Parliament cleared that the European Union is trying a different approach with its regulations, given the lack of harmony across the Union, with countries having inconsistent financial mechanisms.

The scope of the recent MiCA proposal only covers stablecoins and other cryptocurrencies such as bitcoin and ether. Central Bank Digital Currencies or CBDCs, security and deposit tokens, and other crypto-related assets are not in scope.

Even though the MiCA framework might sound enticing for crypto businesses, given that it will allow licenses to be applicable across different states, there have been some concerns from the industry on how it will impact the E.U. crypto market in other manners. Some have specified that even though license and legal assurance sounds attractive enough, stricter rules and mandates under MiCA might impede investments and innovations.

THE CURRENT STATE

With the current prerogative that each European states have, various approaches in terms of crypto directives are being applied in each country. Each state had to create its bylaws and mandates for crypto tokens, in line with a few guidelines that all had to adhere to.

In the past few years, countries across Europe have initiated regulatory implementations primarily compelled by two factors:

  1. The VASP or virtual asset service providers guidance, which was published in 2019.
  2. The Anti-money Laundering law or AMLD5 created by the European Union in 2020.

These two served as guidelines to each state, providing objectives that should be attained but leaving the countries to manufacture laws on their own independently.

These differences each European country has in their crypto-related regulations have confused some industry players. Do they have to apply for licenses in almost 30 different states to be able to venture into Europe? How will they be able to leverage the freedom of movement for business activities?

Bitpanda, an Austrian cryptocurrency exchange company currently ventures across 37 states, has had to tediously work on multiple licenses and approvals locally within Europe.

The European Parliament mentioned that the MiCA initiative targets to guarantee that the European market will be able to keep up with the growing business of cryptocurrencies. They indicated that security for investors and customers should be upheld, with a competent market leveled with enough resources for the industry to understand and comply with.

WHAT MICA HAS TO OFFER

The recently published MiCA framework generally covers digital assets, describing them as virtual versions or characterizations of money value, cached and used in digital transactions through blockchain technology. It subcategorizes these crypto-assets as below:

  • Asset-reference tokens – are broadly defined as tokens built on the foundation of multiple fiat currencies. The most famous example is Libra, renamed Diem, known to the public since 2019 as a stablecoin introduced by Facebook.
  • E-Money Token – pertains to stablecoins created to be valued the same as fiat currencies. Samples are USDC and USDT created under the U.S. dollar.
  • Utility Tokens – assets created to access digital transactions, only accepted by the developer of that asset, like the BAT or Basic Attention Token owned by the Brave, a web browser company.

The MiCA Framework: Europe's Proposal for Crypto RegulationsUnder MiCA, business players of these cryptocurrency categories in Europe should obtain approvals and licenses in their respective local financial government bodies by sending white paper 20 days in advance.

In the crypto industry, a white paper is a business document with an investment roadmap created prior to any business release. The local government will then have the authority to approve and allow the emission of those assets.

Businesses that cater services related to these digital tokens must obtain a license in any European state. Once approval from any local government is obtained in accordance with the European laws, the expansion of crypto ventures will be allowed in other states without any additional licenses. With this, the local custom-made regulations in each state would no longer be applied.

With MiCA, countries with strong regulations and licensing processes for digital tokens will have a much easier and more efficient mechanism, following the new conditions applicable across Europe.

Despite this, the European Union clarified that security measures and compliance would not be neglected.

Based on the assessment by the European Union, the price of a white paper under MiCA would be much higher for crypto businesses, with compliance costs of around 4 thousand USD to 87 thousand USD, depending on complexity and the level of legal interventions necessary.

With this, industry experts raised concerns, pointing out that growing licensing costs might result in investors moving to other states outside Europe.

FOCUS ON STABLECOINS

Back in the year 2019, Facebook (now called Meta Platforms) announced its Libra initiative, a stablecoin supposedly to be founded under multiple platforms and multiple fiat currencies. However, upon its announcement, the U.S. government raised scrutiny and mentioned that they had to study the impact of this project, ordering Facebook to halt the plan. Consequently, the company then announced that the vision would no longer continue but eventually rebranded the project under the name of Diem.

With the proposed MiCA framework, certain conditions and requirements for all stablecoin businesses will be applied, like the required capital funds ownership of 400 thousand Euros for all stablecoin business owners.

The proposal also detailed incremental conditions for “significant” business owners, defined as any business having activities of at least 500 thousand a day and at least 1 billion market cap.

The MiCA Framework: Europe's Proposal for Crypto RegulationsThese so-called significant businesses, such as USDC and USDT, will require additional conditions under MiCA, including having funds equivalent to 3 percent of its reserved assets.

For example, the stablecoin USDT, which currently has 25 billion USD, would need to warrant at least 75 million USD as its capital funds. As of writing, USDT has a net supply of only 72 million U.S. dollars.

Few business players mentioned that these additional requirements for considered significant users seem to be too much.

The MiCA proposal agreed and mentioned cautions with these specific conditions for significant users since these could potentially result in inconsistencies with its objective to secure continuous business innovation in the industry. However, the framework somehow justified this, pointing out the apparent risks to financial freedom and market stability.

However, it is deemed that the MiCA proposal would not be altered as of yet, given the recent issues for global stablecoins in the market. Just recently, USDT and USDC have received criticisms from both U.S. and E.U. markets regarding their unverified reserves.

Currently, most trading partners of Binance with a massive volume of transactions involve a stablecoin. With this, professionals indicated that regulations brought by MiCA would negatively impact the competitiveness of the European market. On the contrary, other specialists countered that the most significant matter is the promise of legal security and should be upheld over the state of stable coins.

With the current state of the MiCA project, effectivity is not expected until 2023. Until then, the status quo will continue, where each state must assess and create its own custom-made laws.

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