Regulation
The European MiCA is finally here. How will the United States react?
On Sunday, the first wave of the European Union’s historic and comprehensive digital asset law will come into force. With the regulatory framework for cryptoasset markets, Europe has managed to do what other jurisdictions, including the United States, still avoid: bring legal and regulatory clarity not to one part of the digital asset market, but to the entire market.
Catalysed by the spectre of Big Tech entering financial markets, such as Meta’s Diem (formerly Libra) initiative, or by fears of an uncontrolled cryptocurrency, the last five years have seen a concerted policy development in Europe. MiCA will have the profound effect of permanently connecting digital assets and the real economy, and in a uniquely European way.
Dante Disparte is the Chief Strategy Officer and Head of Global Policy at Circle.
The opinions expressed in this column are those of the author and do not necessarily reflect those of CoinDesk, Inc. or its owners and affiliates.
During the first decade of cryptocurrency, much of the industry was characterized by a recurring and exorbitant boom-bust cycle that, in many ways, made it a quintessentially American market. As a result, the U.S. dollar is not only the pricing benchmark for digital assets (thanks to the steady rise of stablecoins, which now exceed $150 billion), but also the reserve currency of internet finance, to the extent that it plays that role in the real world. MiCA aims to solve this problem by giving euro-denominated stablecoins, which will be classified as e-money tokens under the new EU rules, a chance of success and a consumer market of 441 million people.
While some aspects of MiCA are protectionist in nature, rooted in protecting European consumers and investors from the fraud and risks that have plagued rapidly evolving crypto markets, there is also a degree of economic and technological sovereignty at stake. This is particularly evident in the way offshore stablecoins – diplomatically called global stablecoins – are not permitted under MiCA. Stablecoins pegged to other currencies must first comply with e-money licensing requirements in Europe, which would involve compliance with prudential, financial crime compliance and other rules. If the stablecoin issuer offers other crypto-asset services, it must obtain a second license – either as a digital asset service provider (DASP), virtual asset service provider (VASP) or crypto asset service provider (CASP), depending on the jurisdiction. This requirement constitutes a basic level of compliance for the custody of digital assets. Beyond these licensing requirements, the days of amorphous crypto companies without a substantial presence in the EU are over.
Indeed, MiCA is as much about job creation and economic competitiveness as it is about consumer and market protection. Authorised entities must have responsible “direction and management” in an EU jurisdiction, which then allows them to extend their operations across the federation thanks to pan-European regulatory harmonisation – although national regulators still have some way to go to ensure that MiCA enters into force smoothly across the common market.
For the cryptocurrency industry and its existential connection to the banking sector, MiCA marks a profound change, one that only the most serious players are ready for. For example, in the resurgent stablecoin category, in which the dollar is the currency of reference, MiCA marks a proverbial fiscal cliff where unregulated or non-compliant tokens will eventually be delisted or their access severely restricted by cryptocurrency exchanges. The reason is simple. Rather than treating stablecoins as a fringe financial product or a mere poker chip in a crypto casino, MiCA brings stablecoins into line with long-standing rules on e-money. Therefore, all stablecoins offered by EU cryptocurrency exchanges must comply with the rules on e-money tokens. This gives the token holder a right to redeem the underlying currency at par directly from the issuer, a way to strengthen collective responsibility and consumer protections across the interconnected digital asset value chain—from wallet to exchange and ultimately to issuer. Compare this model to the amorphous standards or lack of prudential safeguards that protect against the run on Terra Luna’s in-name-only stablecoin. Had Terra Luna complied with the equivalent of electronic money in the United States, namely state money transmission laws, consumers might have been better protected from the crash.
Under the current EU model, all regulated stablecoins will now have a common regulatory base, which will not only encourage competition but will ultimately lead to broader fungibility and interoperability across the EU market. Like all new comprehensive rules or regulations, MiCA is imperfect and, in places, overly prescriptive, so much so that EU policymakers are already considering MiCA 2.0, which would potentially fill some of the gaps in the regime, such as non-fungible tokens (NFTs), decentralized finance and other areas. While MiCA has now given European cryptocurrency market participants clear rules, on the US side of the Atlantic, imperfect rules or a lack of federal regulation have allowed an industry to flourish. Should the transatlantic tech divide widen – or should the US and key EU partners aspire to shared digital commons?
If US political leaders adopt a competitive stance vis-à-vis the EU in the digital asset space, a true “NAFTA for digital assets” can be envisaged across North America. A sustainable alternative, however, would be to form a Western transcontinental alliance for digital assets that would enshrine the democratic values shared in these emerging markets and take into account how exponential technologies will shape the future.
Now that the world has MiCA, it is time for the United States to act and reassert its place as a global leader in financial services regulation and innovation.