EU’s MiCA, a template for international regulation?[Column]| coindesk JAPAN | Coindesk Japan

On April 20, the European Parliament passed the Markets in Crypto-Assets Act (MiCA).

While the outcome of the vote was predictable and not particularly surprising, it was certainly a momentous moment in the sense that the 27 EU member states were one step closer to becoming the first in the world to develop comprehensive crypto asset legislation. With only a few formalities remaining, the countdown to enforcement will begin in June and take effect 12 to 18 months later.

The bill had already been agreed for the summer of 2022. It took a long time to get the 571-page bill through the EU’s legal and translation departments. There were rumors that there was a conspiracy theory or something deeper, but that was the only reason for the delay.

We’ll have to look closely to see if the bill agreed last year hasn’t changed as it passes through the legal department, but the changes will likely be minor.

Is MiCA the Best?

The market could not be more positive about regulation right now. After market ups and downs, U.S. regulatory turmoil, layoffs and more, the centralized cryptocurrency market has fallen in love with MiCA. Licenses tailored to crypto asset service providers and stablecoin issuers that can be used in common for 450 million potential customers in 27 EU member states will be provided.

DeFi (decentralized finance) and NFTs are intentionally excluded from regulation. It is based on the 2014 capital market regulation Markets in Financial Instruments Directive (MiFID), but it is not a complete copy.

For example, there is no eligibility test that distinguishes knowledgeable and non-knowledgeable cryptocurrency investors. The rules for stablecoin issuers give consumers confidence that their reserves are properly prepared and can be redeemed at any time.

Banks, custodians and asset managers are now concerned about the reputational risks associated with handling crypto assets, but MiCA allows institutional investors to feel comfortable with crypto as an asset class.

MiCA was drafted by excellent technical bureaucrats. Discussions on the bill unexpectedly coincided with a bull market, grabbing a tailwind of political interest and optimism that have since faded.

In my opinion, MiCA is politically acceptable and a valid compromise based on the existing rule framework. Now that the market has matured and the pressure for profitability is pushing for governance and risk management, it was just important to get it done. It provides clarity to entrepreneurs and prevents policy makers from reacting to industry problems in a knee-jerk reaction.

serious weakness

Based on the existing regulatory framework, MiCA will regulate token issuers as organizations rather than regulating the exchange of tokens as an act. In other words, it is the token issuer who imposes the requirements regardless of how the token is used. I think this point limits MiCA’s future potential.

Regulatory professionals will recognize this weakness. Because there are already examples. Over the past decade, the watchword for authorities from Europe to Asia has been to respond to the unbundling of financial services by making regulation activity-based rather than organization-based. For example, we are now focusing on the activity of “deferred payment” rather than banks as a type of organization.

Issuing tokens as bearer securities makes this impossible. Issuers are not, or at least were not, responsible for determining whether tokens are used for payments or investments.

The EU focused on possibilities and tried to achieve the impossible. Currency-backed tokens are more likely to be used for payments than anything else, so they should follow that regulatory framework. In EU terms, this is called an e-money token (EMT) and is regulated as such because the freely fluctuating token is closer to an investment.

A lot of political energy was spent on tokens pegged to baskets of currencies, commodities and other assets. It was as if Europe was chasing the specter of Libra, the stablecoin that Facebook had botched, and the market was busy moving on. The rules for such stablecoins have become complex and opaque as they try to address both payment and investment use cases.

This shows that crypto assets are complicating the general distinction between payments and investments. Technical rules for MiCA Level 2 will draw a clearer line, but it will be a difficult task. There are 20 technical standards to be developed for MiCA, and this may be the most difficult one.

By putting the legal framework in place, the EU may be able to create the market behavior envisioned by the MiCA. That is, which tokens are used for payments and which are for investments.

Furthermore, while EMT’s market function may be similar to e-money, its technology is similar to other tokens. The EU has so far flipped its stance on technology neutrality.

For anti-money laundering purposes, EMTs are treated differently than e-money because of the underlying technology. But the European Commission is expected to propose in June that EMTs should offer the same consumer protections as e-money, such as reversal of payments, which are incompatible with the underlying technology.

Will MiCA become an international template?

For international companies, the important point is when and how international crypto-asset regulations will be established.

Regulators are asking themselves the same question. Few rules exist in Europe that could protect EU citizens from substandard services provided from abroad for digitally accessible markets like crypto assets. Especially when non-European exchanges offer tokens whose prices are inflated by the hype (such as last year’s LUNA) and EU citizens jump on it.

The Financial Stability Board (FSB) is working on an international framework that needs to be rolled out by G20 members. Since MiCA was completed first, the EU strongly hopes that the FSB will follow suit. The FSB, having learned lessons from the FTX scandal, may take a tougher stance on investment practices and asset mix-ups. In parallel, the UK, which is not a member of the EU, is also preparing its own stablecoin and cryptocurrency service rules similar to MiCA.

There may be a time lag, but there are plenty of opportunities for Europe to export MiCA. But the combination of lag and bear market could temporarily leave businesses facing inconsistent regulation and consumers suffering from unstable companies.

Mr. Dea Markova: Managing Director and Head of Digital Assets at Forefront Advisers.

｜Translation and editing: Akiko Yamaguchi, Takayuki Masuda
｜Image: Shutterstock
｜Original: Is Europe’s MiCA a Template for Global Crypto Regulation?