Key Highlights:
- The growing need for cryptocurrency regulation;
- The EU Regulatory Framework MiCA goes live this year;
- MiCA classifies cryptocurrencies into three sub-categories,
- Regulating the crypto industry comes with immense benefits.
The 2022 Roller Coaster
Image Source: Coingape
The need for cryptocurrency regulation has been a recurring topic in the crypto space, with global authorities at different stages of regulating the crypto industry in their jurisdictions.
Following the numerous tragedies that trailed the crypto market in 2022, especially the Terra meltdown, the FTX collapse, and humongous scams and hacks, the argument for the regulation of the industry has become even louder. Undoubtedly, a more regulated market would have never witnessed the level of washout suffered by investors from these events.
For the European Union (EU), this regulatory framework is the “Markets in Crypto-Assets (MiCA) Regulation,” which covers several key areas in the crypto space, including transparency, disclosure, authorization, and supervision of transactions.
So, let’s talk a little about the much-debated MiCA regulation and how the EU plans to roll out its regulatory framework.
The MiCA Regulation Explained
The EU currently leads many other world powers in rolling out a crypto regulation framework, which is slated to be released later this year. Law firm Akin Gump described the legislation as “one of the first attempts globally at comprehensive regulation of cryptocurrency markets.”
So what is this MiCA?
It’s a piece of legislation targeted towards bridging the existing gaps in the EU financial services legislation through the creation of a well-coordinated set of rules for crypto assets and crypto-related services and activities. One major area the MiCA regulation focuses on is controlling the issuance and use of stablecoins.
Apart from stablecoin regulation, the Markets in Crypto-Assets Regulation also includes the Digital Operational Resilience Act (DORA) and the DLT Pilot Regime Regulation.
According to reports, the European Parliament will assemble in February this year to vote on the bill. After successful formal approval by the Council of the EU, the legislation will be published in the European Union’s Official Journal and go into effect after 20 days.
However, MiCA rules will only start applying to the appropriate organizations and firms after an 18-month transitional period, when the European Securities and Markets Authority (ESMA) will issue conditions for classifying digital assets either based on MiCA’s specifications or not.
This means that though the legislation itself could go live by March 2023, the dictates of MiCA will not take effect until Q3 2024, at the earliest. Meanwhile, stablecoin rules will start applying after a 12-month transitional period.
MiCA Divides Crypto Assets Into Three Categories
Source: European Parliament
As mentioned earlier, MiCA focuses on regulating primary market activities, such as the issuance of tokens and public offerings, and public access to the secondary market, such as listings, and provides specific crypto-related services, of which it provides a catalog of 10 services defined as “crypto-asset services.”
Crypto service providers that fall into this category include companies that offer custody and administration of crypto assets for third parties and the operation of a trading exchange.
According to the legislation, a “crypto-asset” is any “digital representation of a value or a right that may be transferred and stored electronically, using distributed ledger technology or similar technology.” Also, the legislation introduces three sub-categories of what it defines as “crypto-assets,” which are based on the level of risk exposure they provide. These sub-categories include:
Electronic Money Tokens (EMTs)
According to MiCA, EMTs, or “e-money tokens,” are crypto-assets that aim “to maintain a stable value by referencing the value of one official currency.” Like e-money in the traditional sense, EMTs are the electronic stand-ins for crypto-assets and will likely be used for payment settlements.
Asset-Referenced Tokens (ARTs)
MiCA describes these as crypto-assets that aim “to maintain a stable value by referencing any other value or right or a combination thereof, including one or more official currencies.” For instance, ARTs can track a list of fiat currencies, commodities, or even crypto assets. In other words, stablecoins.
Image Source: Google Images | Stablecoins
Everything Else Outside EMTs and ARTs
The third sub-category of crypto-assets, as seen by MiCA, is a basket category that contains everything outside EMTs and ARTs. These could include anything from non-pegged payment tokens to utility tokens. However, MiCA makes a few specific rules for utility tokens, which it defines as “a type of crypto-asset which is only intended to provide access to a good or a service supplied by the issuer of that token.”
That said, the dictates of MiCA do not apply to crypto-assets already under the purview of financial services legislation, such as security tokens that qualify as financial instruments under MiFID II.
The regulatory framework also does not cover crypto-assets said to be unique and non-fungible with other crypto-assets, such as NFTs. NFTs issued “in a large series or collection,” on the other hand, may be considered fungible and thus covered by MiCA. The exclusion also does not apply to fractional NFTs.
The Crypto Industry Is in Need of Regulation
Regulation in the cryptocurrency space should not be feared, as it is a good thing for several reasons. First and foremost, it helps to protect consumers. Without proper regulation, it can be difficult for individuals to know whether the cryptocurrency projects they are investing in are legitimate or not.
The introduction of regulations will help ensure that only reputable projects can operate and that consumers are better protected against fraudulent activity.
Second, regulation can help increase the overall stability of the cryptocurrency market. The crypto market is currently experiencing one of its worst bearish cycles, which has put immense strain on investor confidence and the outlook for the market. A more regulated market will help to stabilize the market, thereby making it more attractive for those looking to use it as a means of storing and transferring value.
Finally, regulation can help increase the mainstream adoption of cryptocurrencies. While cryptocurrencies have come a long way in recent years, they are still not as widely accepted as traditional forms of payment. This is often because people are hesitant to use them due to the lack of regulation in the space.
By introducing regulations, governments can help to create a sense of trust and confidence in cryptocurrencies, which could lead to more people using them in their everyday lives.
