Opinion: EU’s MiCA set to raise bar for crypto regulation — with some challenges
Crypto bros are spewing FUD regarding the European Union’s (EU) proposed regulations on crypto, known as the Digital Finance: Markets in Crypto-Assets (MiCA). Overall, it offers more protections for customers and new environmental disclosures that exchanges would have to make for the biggest cryptocurrencies they offer on their platform.
Most of the FUD relates to the newly proposed articles by the EU Parliament’s Economic and Monetary Affairs Committee (ECON), which states exchanges should apply more due diligence to crypto they receive on their platforms from unhosted wallets.
Yet in reality, Europeans already have to do that when it comes to our bank accounts. Today, most will ask to provide documented proof of the origin of funds; rarely do banks accept money without any questions. These new proposals would mean the same is applied to crypto exchanges.
With MiCA, the EU also intends to regulate stablecoins — which it calls “electronic money tokens” — distinct from cryptocurrencies, in the sense that they can be viewed as very similar to e-money according to article 2 of the Electronic Money directive. However, for such stablecoins to be considered e-money tokens, they need to be backed by actual fiat and also need to be redeemable by their equivalent in traditional currency. The regulations exclude algorithmic stablecoins from being considered e-money, since they’re backed by nothing.
Additionally, if legislation passes:
- Reserve assets of e-money tokens would always have to correspond with the number of e-money tokens issued,
- reserve assets can’t be pledged as collateral or be invested in high-risk instruments,
- and large issuers will also have to cover any losses of their customers if reserve assets fall less than customer deposits.
It seems that on stablecoins, the EU’s MiCA provides rigorous protection to customers. The European Banking Authority will also supervise and enforce regulations on e-money in collaboration with the European Securities and Markets Authority (ESMA) which is also tasked to enforce the new rules.
The issuance of crypto assets is also regulated and has to be approved by the ESMA with each crypto-asset having the legal obligation to publish its white paper with details of its workings. Issuers have to declare any conflict of interest, provide details of their investments and holdings of their assets, and act in the best interest of their holders. Issuers of crypto coins should also have a minimum investment of €350,000 available at all times.
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The new rules under MiCA also come with stringent regulations on brokerages providing access to crypto markets, which are mostly intended to protect the consumer. Brokerages have to provide full disclosures of their activities and workings to the ESMA and have to act in the best interest of their clients.
- Brokers have to segregate clients’ funds with their own funds and can not use client assets as collateral.
- Whoever owns more than 5% of the exchange has to be of good reputation and with no history of money laundering, financial, or commercial criminal offenses.
- Brokers are also obliged to come up with preventive measures against market abuse on their platforms.
MiCA proposes crypto environmental footprint disclosures
What’s also very interesting to the crypto holder is that the new rules explicitly outlaw any form of market manipulation which includes holding a dominant position in a particular asset to the extent that it can affect its price. Suspending activities on a crypto exchange to affect the price of an asset is also prohibited, as is providing false details on the volume and supply of assets.
Crypto exchanges are also obliged to follow the existing EU directive on money laundering 2015/849. However, most contentious to crypto bros, ECOM went a step further by proposing that brokers list the environmental information related to each crypto available on its exchange – including in which location they’ve been mined.
If adopted, it remains to be seen how the inclusion of crypto-mining in the EU finance taxonomy regulations will work out in practice. While great for transparency, sourcing the environmental information on crypto mining will be a challenging task.
Regardless, it’s clear the EU’s MiCA is leading the way when it comes to crypto regulation. Overall, as a crypto bro, I would say this is a good thing.
MiCA was introduced back in 2020. As is the case with all proposed legislation by the commission, MiCA made its way to the European Council and its crypto regulation plans were discussed by member-states. Last week, the committee completed its negotiations yet must still publish its latest conclusions — the committee’s spokesperson said changes are only technical in nature and the overall principles remained the same as per the latest draft.
The proposed regulations have to now go to the EU Parliament only to then pass to the Council of Ministers for final ratification. Changes to the proposals may still be made at the latest stage, given that EU member states have to agree unanimously on the text.
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