The Markets in Crypto Assets regulation, or MiCA, is part of a package of EU measures governing digital finance that spans anti-money laundering, innovation in financial services and a digital version of the euro. MiCA is designed to weed out scam investment schemes, fraudulent businesses, criminal activity and, ultimately, avert the kind of messy business failures that can cascade and destabilize traditional banking too.
Crypto companies will need to register with a financial regulator in at least one EU member state. This would put them under the supervision of two of Europe’s top financial watchdogs, the European Banking Authority and the European Securities and Markets Authority. They will make sure companies have adequate risk management and corporate governance practices in place. Issuers of stablecoins — digital tokens that aim to maintain a one-for-one peg to a less volatile asset like the US dollar — will have to back up their value with sufficient reserves. Those pegged to non-euro currencies will face a €200 million ($220 million) daily cap on trading volume within the region under certain criteria. Crypto companies must also adhere to the EU’s transfer of funds regulation, also known as the Travel Rule, which means exchanges will need to send information on senders and recipients of cryptoassets to their local anti-money laundering authority.
3. Who needs to comply?
The rules cover any entity that wants to market and operate crypto services from within the bloc. That’s a fairly big chunk of the sector: In 2022, $1.3 trillion worth of cryptoassets were received in central, northern and western Europe, or about 22% of the global industry, according to Chainalysis. The rules cover exchange operators, custody providers and marketing and advisory services, among others. Entities based outside the EU where the rules don’t apply will still be able to serve customers inside the bloc, as long as they are not seen to be directly seeking out their business.
4. Will this set a global standard?
The EU’s sheer economic power means the rules it sets locally can achieve global reach, as was the case with its General Data Protection Regulation. However, it faces several rival efforts to set the pace in governing virtual assets. Critics say MiCA was outdated before it even took effect and would have done little to prevent some of crypto’s recent high-profile blowups. The rules have been revised repeatedly since they were first devised in 2020, as new technologies emerged and companies went bust. The final text fails to tackle crypto staking or lending — a practice that was at the heart of some of the industry’s biggest failures in 2022, including Celsius, Babel Finance and Genesis. MiCA contains no rules to oversee nonfungible tokens or decentralized finance, which is prone to hacks and fraud because it’s managed by code rather than humans. European Central Bank President Christine Lagarde has called for a MiCA 2, which could cover the issuance of specific assets like Bitcoin as well as lending and staking.
5. What’s been the crypto industry’s response?
Executives at some of the biggest crypto firms have taken issue with parts of MiCA, but say it’s better than having no rules at all. MiCA at least provides a route to registration that’s relatively simple, and offers boundaries to operate within. They draw a contrast with the US, the biggest crypto market, which they say lacks clear guidelines on which digital assets count as securities or commodities, and therefore which regulator should oversee them. Some have decried what they call “regulation by enforcement,” in which US authorities crack down on rule-bending activity rather than come up with new laws specifically tailored to digital assets. San Francisco-based Coinbase has hinted that a move to the UK is at the top of its list unless the US regulatory landscape improves.
6. What doesn’t the crypto industry like about MiCA?
The ability to stay anonymous is one of crypto’s founding principles. So many crypto managers aren’t pleased that MiCA requires users to supply identifying information for anti-money laundering authorities on every transaction. The cap on trading volume could also be a turn-off. However, many details of the cap are yet to be decided and some crypto companies are hopeful the final arrangement will be less draconian than they initially feared.
7. When will MiCA’s rules take effect?
The final text is expected by the end of June and is due to enter into force in July, although the rules themselves will be applied progressively to give the industry time to adjust. The provisions around stablecoins will begin to apply in July 2024, while broader rules affecting crypto asset service providers will come into effect in January 2025.
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