Here’s how MiCA regulation will impact the European cryptocurrency market

The following is a guest post by Mike Romanenko, CVO and co-founder of Kyrrex.

The European crypto landscape is set to undergo a major transformation with the introduction of the Markets in Crypto Assets (MiCA) regulation. Mike Romanenko, CVO and co-founder of Kyrrex, predicts that this regulation will present multiple opportunities and challenges for crypto players in European countries.

Expected changes after MiCA adoption

THE Adoption of MiCA The entry into force of the new regulations in European countries marks a radical change for the cryptocurrency industry. For market participants, these regulations introduce strict rules governing various facets of the industry, including cryptocurrency exchanges, custody of funds, and customer verification processes. While these rules may seem quite restrictive at first, they are designed to improve the security and transparency of cryptocurrency operations.

Most importantly, one of MiCA’s primary goals is to protect end users by ensuring that companies adhere to transparent auditing practices and maintain verifiable reserves. This need for transparency has become particularly evident after the many bankruptcies of large crypto companies since 2020, including FTX Crashwhich exposed vulnerabilities and risks within the sector.

I believe that regulation will facilitate the entry of institutional investors into the cryptocurrency market. By establishing clear and consistent rules, MiCA can help attract significant institutional and corporate funds, thereby strengthening the liquidity and stability of the market. The situation reflects the introduction of Bitcoin ETF in the United States, which allowed institutional investors to gain exposure to Bitcoin through regulated financial products.

The challenge of implementation

Despite the long-term benefits, I didn’t expect the initial phase of MiCA implementation to be easy. Europe currently has around 2,000 virtual asset service providers (VASPs), many of which are in no rush to comply with the upcoming regulations. Local authorities will face considerable pressure to review and approve applications quickly, which could lead to potential backlogs and operational delays.

Some countries, such as Malta and France, have already started to align their regulations with MiCA, but the overall level of preparedness varies considerably across Europe. I expect this disparity to lead to a period of confusion and disruption as businesses work to comply with the new standards.

The entire process is planned to last three years, from June 2023 to July 2026, and includes the following steps:

• Entry into force of MiCA (June 2023).
• Deadline to waive the grandfather clause or reduce the duration (June 2024).
• Entry into force of MiCA (December 2024).
• End of the transitional phase (July 2026).

MiCA has the potential to have a significant impact on the cryptocurrency market within the EU. I would like to highlight the following expected effects:

• Enhanced consumer protection. The aim of MiCA is to establish clear rules for crypto-assets, providing better protection for investors.
• Greater market integrity. By establishing governance standards, MiCA aims to promote fair competition and prevent market abuse.
• Simplified cross-border operations. A harmonised regulatory ecosystem will make it easier for EU businesses to operate across borders.
• Stimulating innovations. The pilot scheme for distributed ledger technology (DLT) market infrastructures could lead to more efficient blockchain-based financial systems.

I would say that the key aspect of MiCA is the new classification of crypto-assets, known as CASP: crypto-asset service providers. It includes exchanges, custodian wallet providers and trading platforms, which will be subject to authorisation by national authorities. The classification aims to ensure that all entities providing crypto services comply with the same regulations.

Regulatory Challenges and Opportunities in the United States and Other Countries

Unlike Europe, the United States does not have a unified regulatory framework for cryptoassets, leading to significant uncertainty. While Bitcoin is classified as a commodity, the status of other digital assets, such as Ethereum, remains ambiguous. Despite what I wanted to see, this lack of clarity complicates compliance and increases the risk of regulatory action against crypto businesses.

There are, however, many positive developments. The introduction of money transmitter licenses (MTLs) for cryptocurrency exchanges has allowed companies to operate legally in several states. Full federal regulation is still pending and is unlikely to be addressed before the next election.

Hopefully, the implementation of MiCA in Europe can serve as a valuable model for other regions, including the US, UK, Turkey, and India. I would like to see that in countries like India, where cryptocurrencies are currently banned, a MiCA-inspired regulatory framework could pave the way for legalized and secure crypto operations. Similarly, Turkey has faced significant challenges with unregulated exchanges, leading to substantial losses for investors. Who would have thought that adopting a structured regulatory approach could mitigate these risks and foster a healthier crypto ecosystem?

At the forefront of cryptocurrency regulation and compliance

Here are some aspects of how leaders are advocating smart cryptocurrency regulation to reshape the European cryptocurrency market:

• Commitment to transparency. Regulated and compliant entities leverage blockchain technology within their centralized infrastructure, improving transparency and efficiency. This approach is evident in the implementation of blockchain technology in internal transactions. Such integrations ensure that all transactions are traceable and secure, in line with the rigorous standards expected of regulated businesses.
• Rigorous monitoring of compliance. A key aspect of regulatory compliance is the monitoring system. It includes internal compliance teams and external auditors who conduct biannual reviews to ensure compliance with all regulatory requirements. One of the notable features of the compliance infrastructure is the live audit log server. It records all actions within the system, especially those in the back office, providing 24/7 access to external authorities for real-time monitoring. This system ensures that any irregularities are quickly identified and addressed, reinforcing the company’s commitment to transparency and security.
• Preparing for the future through strategic investments. Strategic investments must go beyond compliance and focus on integrating new technologies. By staying in tune with current market trends, companies seek to integrate the latest advancements into their ecosystem. This approach not only improves their service offering, but also keeps them at the forefront of industry developments.
• Extension of regulatory licenses. The firms are working to obtain additional regulatory licenses to expand their service offerings. One of their goals is to acquire the Markets in Financial Instruments Directive (MiFID) license, which allows them to offer regulated derivatives trading in Europe. This move is poised to fill a significant gap in the market, providing a transparent and compliant platform for futures and perpetual trading.
• Adapting to the global market. Beyond Europe, companies are also looking to the US market, despite current regulatory uncertainties. By securing money transmitter licenses (MTLs) in several states, they plan to strategically expand their presence in the US. This expansion underscores their commitment to navigating complex regulatory environments to offer secure and compliant services globally.
• Innovating for the future. The long-term vision includes the development of a comprehensive financial super app, integrating a wide range of services within a single platform. The companies aim to leverage blockchain technology to reduce transaction fees and improve the overall user experience, further driving adoption.

Conclusion

The implementation of MiCA represents an important step towards establishing a safe and transparent crypto market in Europe. While I expect the transition to be difficult, the long-term benefits of enhanced regulation, increased institutional investment, and greater market stability are substantial.

Furthermore, MiCA’s regulatory framework could serve as a model for other regions looking to effectively regulate their cryptocurrency markets. As the global cryptocurrency industry continues to evolve, lessons learned from Europe’s regulatory journey will be invaluable in shaping the future of digital assets around the world.

As the cryptocurrency industry continues to mature, the importance of strong regulatory compliance cannot be overstated.

Fuente