Regulation
Cryptocurrency after the European Union MiCA regulation
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THE Regulation of crypto-asset markets (MiCA) marks an important milestone in the European Union’s journey towards regulating the rapidly evolving cryptocurrency market. Its timing and provisions are of paramount importance for businesses and investors in cryptocurrencies. With crucial dates approaching, starting with the application of the provisions on stablecoins from 30 June 2024 and the full application of MiCA on 30 December 2024, the cryptocurrency landscape is undergoing a transformational phase.
Over the next two years
The staggered deadlines and transition periods of MiCA, extending until 30 June 2026, imply a fragmented implementation period across the EU and the European Economic Area (EEA). Jurisdictions such as Ireland (12 VASPs), Spain (96 VASPs) and Germany (12 VASPs) will grant a 12-month transition period. In contrast, other jurisdictions will offer longer periods, such as France (107 VASPs) with 18 months, while Lithuania (588 VASPs) will likely grant only five months. This transition phase will lead to market consolidation, as not all existing service providers will obtain MiCA licences. Many will seek to take advantage of this interim period before winding down their operations.
The race among EU/EEA jurisdictions to become the leading hub for crypto activities is intensifying, with jurisdictions such as France, Malta and Ireland competing to take the top spot. However, regulators’ preparedness and compliance for crypto-asset businesses pose significant challenges. Regulators face an adjustment period to upskill their staff to handle MiCA applications, particularly in jurisdictions with high volumes of applications. The complexity of the different business models, encompassing many products unfamiliar to regulators, exacerbates this challenge. The general lack of expertise to authorise and supervise this sector requires significant training efforts.
Challenges for Crypto Businesses
MiCA, together with the wide range of related Level 2 measures (many of which have yet to be finalised) and other applicable European instruments such as anti-money laundering laws, the Digital Operational Resilience Act (DORA) and the Electronic Money Directive (EMD), create a complex regulatory framework. It will be difficult for some to understand which provisions apply to each type of entity and what documentation must be implemented.
The delisting of cryptoassets, particularly stablecoins, from EU exchanges due to the inability of their issuers to obtain their licenses on time will pose significant hurdles and limit the availability of certain assets to consumers.
Adapting to MiCA will strain many entities and require substantial investments in technology infrastructure. Travel rulea requirement that information must be shared between VASPs with every crypto transaction, also comes into force at the same time as MiCA. The Travel Rule requires CASPs to transfer a substantial amount of information about the sender. This includes their address, personal identification number, and customer identification number. In rare cases, it may even require the disclosure of the originator’s date and place of birth. This adds another layer of complexity, further highlighting the need for harmonization within the EU and solutions to comply with the Travel Rule that are interoperable and allow for secure data sharing while preserving user privacy.
Main results of the cryptocurrency market
Despite the challenges, MiCA inspires confidence in EU entities through enhanced regulatory oversight, promoting investor protection and attracting traditional institutional participation. Strengthened consumer protection measures mitigate risks such as fraud and hacking, promoting trust among retail customers.
MiCA’s reporting requirements will provide EU regulators with more data, allowing them to effectively monitor market activities. The ability to freely passport activities across the EU will facilitate cross-border operations and reduce regulatory fragmentation while expanding market reach.
The prescriptive nature and comprehensive regime of MiCA sets a precedent for global regulatory frameworks. Other jurisdictions are already observing and could replicate some of the provisions and approach of MiCA, thereby contributing to regulatory harmonization globally. However, concerns remain over whether this will stifle growth and innovation and whether businesses will seek to relocate to more permissive and less restrictive jurisdictions.
Steps after MiCA
MiCA’s shortcomings in regulating emerging areas such as true defi (the provision of financial services or issuance of financial assets without identifiable intermediaries and a single point of failure), lending and NFTs require continued policy discussions and new regulatory measures. Reporting on these aspects will inform future regulatory developments, potentially leading to a second iteration of the MiCA in at least the next four to five years or to additional measures.
MiCA marks the beginning of a new era of regulation in the cryptocurrency market, aiming to balance innovation with investor protection and market integrity. While challenges persist, MiCA lays the foundations for a more transparent, secure and inclusive crypto framework in the EU and beyond. As the cryptocurrency landscape continues to evolve, regulatory regimes must adapt to emerging trends and technologies, ensuring sustainable growth and fostering investor confidence.
Ernest Lima
Ernest Lima is a founding partner of XReg Consulting and a qualified lawyer with over 17 years of experience in financial services regulation. As head of legal and regulatory policy at XReg, he has extensive experience in the design, development and implementation of crypto legislative frameworks that meet global and local policy objectives. At XReg, Ernest draws on in-house expertise in European Crypto-Asset Markets (MiCA) regulation to advise European clients or those seeking to enter the European market. He also leads the engagement of European public sector managers and national competent authorities in their transition to MiCA compliance. Ernest has also spoken at industry conferences and educated international regulators on the European MiCA regulation and how it will shape the future of the international crypto regulatory landscape. He also serves on the Financial Markets Law Committee to address issues related to the use of cryptoassets and DLT.