In an exclusive with crypto.news, Jón Helgi Egilsson, a former Icelandic central bank chairman, sets out how the European Securities and Markets Authority (ESMA) is entering the final phase of crypto asset regulation in the European Union (EU), and what this means for Crypto Assets (MiCA) legislation.
The cryptocurrency market is becoming more deeply ingrained in the public sector. The need for a legal framework that guarantees security, stability, and trust is of the utmost importance, with the latest MiCA regulations being hailed as the answer.
Yet, despite its significance, MiCA is enveloped in confusion and misunderstanding, particularly regarding its impact on stablecoins and their compliance requirements.
In an exclusive interview with crypto.news, Jón Helgi Egilsson, a figure well-versed in the intricacies of financial regulation and the crypto landscape, describes what the market and MiCA regulations has in store for the crypto industry.
The co-founder and chairman of Monerium and a former chairman of the supervisory board at the Central Bank of Iceland, Egilsson is uniquely positioned to shed light on MiCA’s nuances. Through his insights, crypto.news looks to decipher its implications for the future of cryptocurrency in Europe and beyond.
What is your stance on the current state of the MiCA regulations?
MiCA addresses three types of assets; e-money tokens (EMTs), asset reference tokens, and crypto assets. MiCA does not address NFTs and DAOs. I have expressed my view before that a technological specific legislation for e-money deployed on blockchains is not helpful.
You highlighted a common misunderstanding regarding the regulatory status of fiat-backed stablecoins in Europe. Can you elaborate on the challenges stablecoin issuers might face as they transition to compliance under both the Electronic Money Directive and MiCA?
Many seem to believe that stablecoins will only be illegal once MiCA comes into force. But that’s a misconception. Fiat-backed stablecoins are already illegal under current e-money laws unless issued by licensed entities. Some issuers have simply chosen to ignore this and operate without authorization. This creates an unfair advantage against compliant issuers who have gone through the proper e-money licensing process. It’s incredibly frustrating to see bad actors gain market share by flouting the rules because EU financial authorities are not doing their job. The real issue is enforcement.
MiCA and the Electronic Money Directive (EMD2) both apply to stablecoin issuers in certain circumstances. Given the potential overlap, how do you foresee this impacting the operational clarity for stablecoin issuers. Does this dual regulation approach benefit or complicate the stablecoin ecosystem?
What MiCA effectively does is to confirm that digital cash offered within the EU has to be regulated as e-money. Nothing new there. However, it adds some provisions based on a claim that it is necessary due to the peer-to-peer nature of the blockchain technology.
How can European regulators ensure fairness in the competitive landscape, given the advantage U.S. companies might have under less strict regulations? What steps are needed to balance innovation with fair competition?
The more lax regulatory environment for stablecoins in the US does give US-based issuers a competitive advantage in the short term. They can bring products to market faster and with less friction than their European counterparts who must deal with the stricter requirements of EMD2 and MiCA.
However, this advantage may be short-lived because US regulators are also looking to implement more comprehensive stablecoin rules. In the long run, Europe’s proactive and unified approach could prove beneficial, as compliant EU-based issuers will have access to the whole European market and enjoy greater legitimacy and trust from consumers.
What about international regulations?
International coordination around stablecoin regulation would also help level the playing field globally. Regulators should collaborate through bodies like the Financial Stability Board (FSB) to align principles and mitigate risks of regulatory arbitrage. A race to the bottom in regulatory standards benefits no one in the long run.
A key area of focus in MiCA has been reinforcing solvency requirements for stablecoin issuers. Regulators hail this as fundamental to mitigating risks associated with the inherent volatility, even for stablecoins. MiCA mandates a stringent solvency standard that ensures that stablecoins, often viewed as safe harbors in the turbulent crypto seas, are backed by robust and reliable financial practices.
MiCA also addresses the issue of proof of solvency among stablecoin issuers. How important is this aspect of regulation for the stability and trust in the broader cryptocurrency market, and do you believe the requirements under MiCA are sufficient?
Proof of solvency is addressed in the e-money legislation and is paramount for financial services and financial stability. Under EU law stablecoin issuers should be regulated as e-money institutions. E-money issuers have to adhere to the supervision of financial authorities, maintain certain own equity standards etc.
What about unauthorized stablecoin issuers?
Unauthorized stablecoin issuers could trigger a domino effect with far-reaching consequences. MiCA reaffirms that stablecoin issues have to be licensed e-money issuers and therefore maintain adequate reserves and submit to regular audits. These measures are crucial for building trust and stability in the broader cryptocurrency market. While MiCA’s requirements simply reaffirms existing legislation in this regard, i.e. continuous monitoring and strict rules. A robust and transparent regulatory framework is essential to prevent stablecoin failures that could potentially destabilize the entire DeFi landscape, that is why it is strange that current EU laws are not enforced.
Can MiCA serve as a model for balancing innovation with consumer protection and market integrity?
Striking the right balance between innovation and regulation is crucial for the healthy development of the stablecoin industry. While stringent oversight is necessary to protect consumers and maintain financial stability, overly restrictive regulations could stifle innovation.
MiCA requires Crypto Asset Service Providers to have robust governance arrangements, including transparent lines of responsibility and recovery plans. How do you see these requirements affecting the operational models of CASPs, particularly smaller entities trying to navigate the regulatory landscape?
Like any business or sector, added regulation is going to add friction. In most cases, though, the European Union’s intentions with MiCA are to regularize digital asset businesses and provide a clear framework for their operation. While the decentralization paradigm that underpins many crypto projects may not always align perfectly with regulators’ desire for clear accountability, the overall goal of protecting consumers and promoting market integrity is well-placed.
Looking forward, how do you envision the global impact of MiCA regulations on the cryptocurrency industry? Do you foresee other jurisdictions adopting similar frameworks?
I think the e-money directive (EMD) is an export standard from Brussel that could underpin a global standard for stablecoins, no doubt. But with regards to MiCA and how it creates technology specific e-money legislation for the blockchain technology I do not see the added value.
However, MiCA also addresses asset reference tokens and crypto assets, which is the novel part of MiCA – not e-money. Apart from e-money, MiCA is a significant milestone in digital asset regulation due to its novelty and attempt to regulate it. Its impact will likely extend beyond the European Union.
As the first comprehensive regulatory framework for asset-reference tokens, and crypto assets, MiCA sets a powerful precedent. If it’s judged to be successful, other jurisdictions may end up copying large parts of the regulation.
