What is the MiCA regulation and how did it shock the crypto industry?
In this article, we will look at what MiCA is, its scope, potential impact on the cryptocurrency sector, and why this regulation has so frightened representatives of the crypto industry.
Introduction
Recent years have seen significant growth in the use of digital assets and cryptocurrencies. The surge in use cases for blockchain technology and the emergence of new cryptocurrencies have led to significant changes in the global financial system.
However, since cryptocurrencies are subject to limited regulation, there is a real threat that the industry could be subject to illegal and dangerous scenarios. Establishing effective regulation of crypto assets is extremely important to protect the interests of investors, ensure compliance with the requirements of financial regulators and prevent potential crisis situations similar to the incidents in Terra, Celsius, FTX, etc.
However, since cryptocurrencies are subject to limited regulation, there is a real threat that the industry could be subject to illegal and dangerous scenarios. Establishing effective regulation of crypto assets is extremely important to protect the interests of investors, ensure compliance with the requirements of financial regulators and prevent potential crisis situations similar to the incidents in Terra, Celsius, FTX, etc.
The European Union has taken a significant step by becoming the first major jurisdiction to introduce comprehensive industry regulations governing crypto asset markets - MiCA - in 2024.
MiCA was first announced back in September 2020. The European Parliament approved this initiative in April 2023, which aims to initiate a new era in crypto asset regulation, highlighting the growing importance of this industry in the financial sector.
Unified regulation of crypto-asset markets
The Markets in Crypto-assets (MiCA) proposal is a broad set of regulatory measures for European crypto-assets and is part of the Euro Commission's Digital Finance Strategy, which includes a legislative proposal to pilot trading and settlement solutions for financial services using distributed registry technologies.
MiCA applies to all types of crypto assets that are not currently subject to standard EU financial rules. This initiative also applies to all crypto asset service providers (CASPs) serving the European crypto industry, regardless of their location or registration.
“Transactions with crypto assets will be monitored in the same way as traditional money transfers,” noted the European Parliament.
This legal framework is said to be aimed at:
protecting the interests of investors,
preventing the misuse of crypto assets,
ensuring transparency in regulation,
maintaining financial stability and protection from abuse and manipulation in the market,
stimulation of innovation in conditions of uncertainty in the crypto-asset sector.
MiCA also promises compliance with anti-money laundering (AML) and counter-terrorist financing regulations. This commitment is the result of pressure from the Financial Action Task Force (FATF)
Prior to the adoption of MiCA, crypto companies operating in the European Union had to comply with the various national cryptocurrency regulations of the 27 countries. The introduction of MiCA removes the need for national regulations and introduces a single EU licensing framework.
Prior to the adoption of MiCA, crypto companies operating in the European Union had to comply with the various national cryptocurrency regulations of the 27 countries. The introduction of MiCA removes the need for national regulations and introduces a single EU licensing framework.
Implementation schedule
The MiCA regulation was published on 9 June 2023 in the Official Journal of the European Union and came into force 20 days later. However, the deadline for compliance with all its provisions is set at December 30, 2024. Although some provisions, especially those related to stablecoins, come into force on June 30, 2024.
Application area
According to the MiCA documentation, a cryptoasset is a digital representation of a certain value or right that can be transferred and stored electronically using distributed ledger technology or similar means.
The law classifies crypto assets into three categories with different requirements depending on whether they stabilize their value by being linked to other assets:
1
Asset-Referenced Tokens (ART) - A crypto asset is pegged to an official currency and must meet strict regulatory requirements, such as being redeemed at par in the reference currency.
2
"Electronic money tokens" (E-Money Tokens - EMT). This category includes any crypto assets whose value is backed by assets rather than electronic money.
3
Utility Tokens. Unlike the first two paragraphs, the Markets in Financial Instruments Directive (MiFID II) does not classify them as financial instruments.
Regarding NFTs - MiCA will not apply to all non-fungible tokens. This law will only apply to NFTs that have the characteristics of an asset to which MiCA would certainly apply. However, the legislation will not apply if the NFT is unique. Which is strange, given the popularity of NFTs as a means of laundering dirty money.
Likewise, regulation will not apply to the activities of decentralized autonomous entities (DEXs) if their activities are truly decentralized.
Likewise, regulation will not apply to the activities of decentralized autonomous entities (DEXs) if their activities are truly decentralized.
Regulation of crypto asset issuers
Issuers of crypto assets, with the exception of ART and EMT, are not required to obtain permission to issue assets. However, one of the key requirements of MiCA is that crypto asset issuers must publish official documents before issuing a token to the general public or listing it on a crypto asset trading platform. In essence, we are talking about tokenomics of projects.
Moreover, if the crypto asset was not yet traded on the trading platform at the time of purchase, MiCA provides retail holders with the opportunity to withdraw from the transaction within 14 days.
Moreover, if the crypto asset was not yet traded on the trading platform at the time of purchase, MiCA provides retail holders with the opportunity to withdraw from the transaction within 14 days.
Regulation of ART and EMT issuers
MiCA introduces stricter regulation of stablecoins for issuers of options such as EMT (Electronic Money Tokens) and ART (Asset-Tagged Tokens) due to concerns around monetary sovereignty and financial stability.
Typically, issuers of such assets require prior approval before listing an ART or EMT within the European Union. This permission can only be granted by the issuer itself unless it obtains written consent from the other party.
Agencies must notify regulatory authorities and publish documents before providing or transferring EMT. ART authorization is only required for issuers in the EU, with prior notification and publication of documents. ART and EMT, considered "significant" under the European Banking Authority's criteria, are subject to stricter regulation.
Typically, issuers of such assets require prior approval before listing an ART or EMT within the European Union. This permission can only be granted by the issuer itself unless it obtains written consent from the other party.
Agencies must notify regulatory authorities and publish documents before providing or transferring EMT. ART authorization is only required for issuers in the EU, with prior notification and publication of documents. ART and EMT, considered "significant" under the European Banking Authority's criteria, are subject to stricter regulation.
Regulation of virtual service providers
MiCA creates a regulatory framework for crypto asset service providers (CASPs) and crypto asset related services. CASPs are legal entities or other organizations whose primary activity is the professional provision of one or more crypto asset services to clients.
The concept of a CASP is similar to the definition of a VASP in the FATF Recommendations, but covers a broader range of services in accordance with the objectives of the Bill. These include exchanges, exchangers and other crypto services.
According to the regulation, CASPs must obtain permission to legally provide cryptoasset services within the EU.
The provision of services in the EU is limited for companies by a number of rules such as:
The concept of a CASP is similar to the definition of a VASP in the FATF Recommendations, but covers a broader range of services in accordance with the objectives of the Bill. These include exchanges, exchangers and other crypto services.
According to the regulation, CASPs must obtain permission to legally provide cryptoasset services within the EU.
The provision of services in the EU is limited for companies by a number of rules such as:
The legal entity is registered in the EU;
Availability of detailed Whitepaper;
Compliance with professional standards;
Minimum net worth requirements.
MiCA supplements these rules with such points as the presence of the head of the company in the EU, capital management rules, etc.
The concept of particularly significant crypto asset service providers (sCASPs) is also provided for when their average annual number of active users in the EU reaches 15 million. Such CASPs are subject to enhanced monitoring and supervision by national competent authorities.
MiCA requires all CASPs to act honestly, fairly and professionally in the best interests of clients. The law also requires CASPs to conduct marketing and communications activities in a fair and transparent manner. Potential clients should be fully informed about crypto asset pricing strategies, risks and climate or environmental impacts.
The concept of particularly significant crypto asset service providers (sCASPs) is also provided for when their average annual number of active users in the EU reaches 15 million. Such CASPs are subject to enhanced monitoring and supervision by national competent authorities.
MiCA requires all CASPs to act honestly, fairly and professionally in the best interests of clients. The law also requires CASPs to conduct marketing and communications activities in a fair and transparent manner. Potential clients should be fully informed about crypto asset pricing strategies, risks and climate or environmental impacts.
What's wrong with MiCA?
We at AML Crypto believe that Mica regulation, on the one hand, represents an attempt by the European Union to establish common norms and standards for the cryptocurrency industry. But on the other hand, there are risks associated with this process:
1
Limitations to Innovation: Too strict rules and regulations can limit innovation in the cryptocurrency space. Crypto projects may have difficulty implementing new ideas due to high barriers to entry, which can slow down the development of the industry as a whole.
2
Bureaucratic Burden: Regulation can impose a significant bureaucratic burden on cryptocurrency companies, especially startups and small businesses. This can result in additional compliance costs, which can be a burden for small businesses.
3
Loss of Anonymity: Regulation may result in the loss of anonymity that is often associated with cryptocurrencies. This may be a problem for those who prefer anonymous transactions for privacy reasons.
4
Inequality of Competition: Larger companies can more easily cope with regulatory requirements than smaller players. This may lead to inequality in competition and increased monopolistic tendencies in the industry.
While regulation can help create a stable and secure environment for the cryptocurrency industry to grow, it is important that it is balanced and takes into account the needs of both users and businesses. Particular attention must be paid to minimizing the negative impact of regulation on innovation and competition in this fast-growing area.
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