While the US still wallows in the depths of confusion regarding the regulation of crypto, Europe steps forward with MiCA implementation.
Passed in April and set to come into full effect by the end of 2024, the rules aim to bring some clarity to the crypto space. While, for now, the rules currently focus primarily on crypto assets, it is seen to be a first step towards the regulation of the full DeFi sector within the EU.
For the most part, the introduction of the rules has been welcome news, proving the legitimacy of digital assets and the companies that are involved. However, it’s not all plain sailing. For providers and exchanges that are not already regulated, the legislation could be a wake-up call.
Established reporting requirements
The set of legislation that has been passed primarily works for the protection of consumers that want to access the crypto asset landscape.
Over it’s extensive text, the legislation outlines the definition of crypto assets, the entities that handle them, and the requirements for certain processes undertaken by the entities.
“A very important note -If you’re serving EU customers, MiCA also requires that you need to have a physical presence and effective management in the EU,” said Janet Ho, Head of Policy at Chainalysis. “So you need to have an office in the EU, you need to prepare a business operation program, and also comply with a number of general obligations.”
The obligations center on bringing clarity to Crypto Asset Service Providers (CASPs) and their customers, implementing AML and CFT checks similar to those already within the traditional financial system. They will also have to satisfy minimum capital requirements and comply with quarterly reporting.
Ho explained that many companies are likely to leave registration of their entity until closer to the December 2024 deadline. “In a positive and good case scenario, the MiCA license will still need four to five months and a very smooth case to get approved. So these are the implications that if you want to keep continuing your business, you want to start your business as early then you need to take into account at least four to five months, if not more, which is often the case that we’ve seen currently on the authorization.”
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Boosting Innovation and Validation
All CASPs will have to undergo extensive obligations. Among others, this will involve outlining governance arrangements, the safekeeping and segregation of client assets, and internal risk management mechanisms. The rules aim to improve transparency within the sector, and many believe it will lead to increased trust.
In a sector plagued by multiple breaches of trust in the past year, proof of supervision by means of an approved MiCA license could give registered entities a competitive edge, both within the EU and beyond.
“For CASPs who want to operate outside EU, if you are MiCA compliant, you also demonstrate a certain level of reassurance to other jurisdictions,” said Ho. “These are very important opportunities, especially for private businesses.”
She explained that governments within the EU can also use compliance to the rules as a safeguard for the crypto entities that could be encouraged to scale up, “It can certainly help drive innovation in the EU,” she said.
For entities already regulated under traditional financial requirements, such as banks and institutional investors, MiCA could also be a turning point.
“For existing regulated entities, there is sort of like a soft approach, an easier approach for you to actually provide the same type of crypto assets services,” said Ho. “It will be very interesting to see whether this type of arrangement will actually get existing regulated entities, including traditional financial institutions, the incentive to participate in the crypto assets ecosystem.”
“It will be very interesting to see whether MiCA, with all the elements of consumer and investment protection to ensure financial stability, will give the confidence and the reassurance much needed by the financial institutions to do business with crypto service providers and provide banking services for them.”
The First Step
MiCA could, therefore, change the shape of the crypto sector, encouraging growth and further innovation within a supervised space.
However, the added requirements could pose challenges to those entities seeking approval.
While MiCA is supposedly “harmonized” across the EU, the area is made up of 27 member countries, each with its own government. The extensive nature of the rules and its focus on a relatively nascent technology could leave some areas open to interpretation.
“Like any other piece of EU regulation, there are opportunities for arbitrage even within the EU,” said Ho. “So a consistent approach in implementing MiCA will be very relevant.”
“Even if we do implement MiCA and implement it well, there will also be risks arising from the implementation. For example, once the countries in the EU are being well regulated by MiCA, what is the operation, and how do we interact with it from other non-EU countries? All these elements could bring challenges.”
In addition, DeFi and assets such as NFTs are barely touched upon, leaving them within the bounds of uncertainty. Many who are happy with the first set of laws remain tentatively skeptical about their ongoing development.
However, the law that was passed in April is a first step that could legitimize the crypto sector and bring the benefits of DeFi onto a mass scale. Already, regulatory bodies are embarking on iterations two and three to help bring clarity to implementation challenges, as well as the areas that still need to be addressed.