As US crypto suffers regulatory crackdowns and bank failures, lobbyists and lawmakers are looking to the EU with envy.
That’s because from afar, Europe looks like it has crypto all figured out, thanks to the landmark 2022 regulation, Markets in Crypto-Assets, or MiCA.
With MiCA, European lawmakers aim to offer clarity on exactly what kinds of assets will come under its umbrella and how regulators want providers of these assets to behave.
MiCA provides a framework for almost all aspects of centralised crypto asset trading, including stablecoin issuance, custody and consumer protection.
MiCA also has a passporting regime, meaning that crypto asset service providers that set up shop in one EU member state are allowed to market their services to consumers throughout the 27-nation bloc.
It’s a refreshing approach and US lawmakers last month sent a team to Brussels to study the law.
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Meanwhile, as Securities and Exchange Commission enforcement draws howls of protest from an industry that sees an enemy in chair Gary Gensler, tailored US crypto regulation does not appear to be coming any time soon.
No crypto utopia
However, lawyers and industry players in the UK and EU say it would be a mistake to view MiCA as ushering in the EU as a kind of crypto utopia.
As EU supervisors hammer out MiCA’s finer details – its technical and implementing standards – the regulation’s complexity is emerging.
“MiCA will indeed give the industry certainty, but I’m not sure they are going to enjoy that certainty as much as they think,” market structure and financial regulation expert Sean Tuffy told DL News. “When firms start to look at MiCA, they will realise it’s not quite the easy ride they were expecting.”
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The European Parliament finalised MiCA in 2022 and it’s now expected to go into effect in 2024. The regulation is awaiting one last vote to align it across all EU member states, but this vote has been delayed twice as MiCA’s documents are translated into the bloc’s 24 official languages.
One London-based lawyer told DL News that the voting delay alone is indicative of how complicated MiCA is. He called MiCA “mini-MIFID” – referring to the bumper set of rules that have governed EU financial markets since 2017 – due to what he said will be MiCA’s layers of standards and guidelines.
These standards and guidelines are expected to be very detailed. They will be drawn up by the EU supervisors, including the European Securities Markets Authority, once the final vote happens.
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ESMA and the other supervisors have six months to put these together, which industry participants say is not a lot of time for the industry to get its head around the standards and influence the discussion on the implementation and reporting burden it will face.
This was a major sticking point for the financial markets when MiFID II was implemented, one compliance expert told DL News. The industry was concerned at the level of detailed reporting requirements that they could not change or influence through lobbying.
“So the next few months will be interesting for the EU virtual asset service providers and custodians wanting to comment,” the expert told DL News.
One example of MiCA’s complexity that is already emerging is the industry’s confusion about what kinds of assets are classified as crypto assets and therefore fall under MiCA’s purview.
The UK lawyer said that many of his clients don’t understand that if an asset doesn’t fall under MiCA, that doesn’t exempt it from regulation. Almost anything that doesn’t fall under MiCA will fall under another regime – most likely MiFID II.
‘I don’t think it’s going to be the gold rush that some seem to think’
“There’s no third way at this point,” he said. “A lot of MiCA is the EU explicitly saying where existing regulations are going to apply to crypto. I don’t think it’s going to be the gold rush that some seem to think.”
Tuffy said he expects MiCA to be implemented much as derivatives clearing regulation was in 2014 — with known issues that were then remediated once it was in play.
There are still some areas that the EU intends to regulate but is going to leave out of MiCA for the moment. Keeping up with changes to MiCA will add more levels of cost and complexity to regulated companies.
“I expect the MiCA regulations to evolve as a process, as opposed to a single event,” Hirander Misra, CEO of GMEX Group, told DL News. “NFTs are not covered, nor is decentralised finance. The latter is hard to regulate given that it operates outside traditional jurisdictional boundaries.”
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Despite MiCA’s challenges, however, Misra said MiCA will create an environment where crypto can flourish.
“I expect to see it as a template that other jurisdictions will seek to replicate in some way, shape or form,” he said.
“Regulation, given recent events, is essential in this space in a way that serves to balance good governance and risk management with innovative market opportunities.”