Europe could lead the cryptocurrency regulatory race with MiCA

While crypto regulation has been a hot topic for quite some time, it wasn’t until last year that governments around the world started to take more interest in regulating the burgeoning crypto market.

El Salvador, which accepted Bitcoin as legal tender last September, further ignited this interest. The MMF went on to warn the country that a lack of regulation in the space could have a detrimental impact on its financial system. The White House is expected to introduce its own set of cryptocurrency laws in the coming weeks. Even Russia’s President Vladimir Putin urged the country’s central bank to consider regulating the crypto industry instead of instituting blanket bans on trading.

However, regulation for regulation’s sake won’t do much to help the industry grow.

The decentralized and global nature of cryptocurrency and blockchain companies makes it difficult to comply with regulations in each and every state in which they operate.

This is what the next bill of the European Union intends to solve.

Borderless business for cryptocurrency companies in the EU

The EU Markets for Crypto Assets (MiCA) framework was originally proposed in 2020 as part of the European Commission’s Digital Finance package. And while the European Council, the European Central Bank (ECB) and the European Data Protection Supervisor took most of 2021 to give the proposal the green light, we could see it ratified in the European Parliament as early as this quarter.

In its latest report, analytics firm CoinShares notes that MiCA negotiations are more likely to be completed by the middle of the year, given the complexity of the European Union’s legislative process.

If ratified, MiCA could officially start in the summer of 2024, transforming Europe’s regulatory landscape to benefit the crypto industry.

What makes MiCA so important to the crypto industry is the fact that it would effectively eliminate the need to comply with local regulations. Despite being all under the same umbrella of the European Parliament, none of the EU member states have the same tax and legal system. This means that a company that wants to operate in the wider EU market currently has to comply with 27 different legal systems, many of which do not yet recognize cryptocurrencies as an asset class.

MiCA offers a universal operating license to crypto companies that meet the standards it prescribes. With a license issued under MiCA, cryptocurrency companies could operate in any country of the European Economic Area, even if they do not meet all the standards of each of the country’s legal systems.

A license issued under MiCA would act almost like a universal passport, providing companies and projects in the EU with a borderless business environment.

The pros and cons of MiCA

There are many things that make MiCA unique in the regulatory space. As well as being a rather innovative way of dealing with regulation in a fragmented union of countries like the EU, it is also one of the first proposals to recognize four different types of digital assets: payment tokens, asset-referenced tokens, utility and e. -money tokens

The proposed legislation will not apply to CBDCs and security tokens, which are already subject to existing EU regulations.

With clear definitions of what each of the token categories encompasses, MiCA would provide companies operating in the EU with a highly transparent regulatory environment. It will also make it easier for companies registered in a country of the European Economic Area to expand their business to the rest of the region.

Many global crypto businesses, particularly cryptocurrency exchanges, have welcomed this all-encompassing bill and look forward to an easier regulatory environment.

However, MiCA comes with a long series of shortcomings.

The legislation was clearly drafted just after Facebook revealed its plans to launch the controversial Libra token, which was later renamed Diem. Its asset-referenced definition of a token seems designed specifically with Libra in mind and introduces regulation that many believe will also negatively affect all fiat-backed stablecoins.

Another major issue with MiCA is blindness to the DeFi space. The incredibly slow and complex process of drafting legislation like this in the EU means its regulators have a hard time keeping up with the market. With the exponential growth of the DeFi industry, any law the European Parliament proposes now would take years to implement, making it essentially obsolete.

Nonetheless, the fact that the European Union is trying to proactively regulate the industry is a positive development overall. Despite the increased cost of compliance, we can expect crypto companies to seriously consider expanding their operations to the EEA. With ever-larger markets like Russia and India actively getting in the way of innovation in the blockchain and crypto space, a tightly regulated yet transparent environment like the EU could turn the region into a new hub of blockchain.