MiCA & Other Crypto-Related Regulations: Striking the Right Balance

Industry InsightsMay 02, 2024

When crypto first emerged, there were no laws or rules regarding these digital transfers. The then unregulated market operated globally and there were no norms to adhere to. However, as it becomes bigger and more structured, countries all over feel the need to set some boundaries and create a legal framework to regulate it. The European Union is going with MiCA and other regulations. But what is it, what are its benefits and how does it affect crypto-related projects and crypto service providers?

The Markets in Crypto-Assets (MiCA) regulation was approved by the European Parliament in June 2023 and includes all the EU members. MiCA is meant to even the plane regarding crypto projects, more specifically centralized and decentralized exchanges dealing with crypto. It is set to be implemented in two stages, taking effect in June and December 2024, respectively.

Currently, the existing regulation aimed at the crypto industry is vague and loose, and mostly argued to prevent money laundering and terrorism financing (applicable in the United States). Cryptocurrency companies operating in the US have to adhere to the Antiterrorism Act and can be investigated and even held accountable if there’s proof they’re involved with criminal activity. Estimations of the U.N. Counter-Terrorism Committee Executive Directorate point out that 20% of terrorist attacks are already being financed via crypto. In April 2023, the US government released a research paper detailing the risks that DeFi might pose, hinting that several criminal activities were taking place via these blockchain-based projects: “This risk assessment finds that criminals use DeFi services to profit from illicit activity, in particular ransomware, theft, scams, drug trafficking, and proliferation finance.”

MiCA: For the Greater Good

MiCA’s implementation doesn’t seem to be related to anti-terrorism as much as it is with evening the plane for crypto-related projects, namely exchanges. Until this was approved, there was no law to abide by. It aims to bring more structure and consumer protection to the crypto industry within the EU. According to the official document, the idea is that every CEX is licensed and complies with stricter rules regarding consumer protection, market manipulation prevention, and capital adequacy.

There is no mention of DEXs, but it’s safe to assume they too will be affected, as the regulation pertains to crypto trading platforms. Regulations like MiCA can have a two-sided impact on blockchain crypto-based projects, bringing benefits and challenges.

So, who’s going to be affected by MiCA? In short, entities that issue or provide services related to crypto assets, such as exchanges, wallet providers, and Initial Coin Offering (ICO) issuers. The Regulation also applies to custodial wallets and security token issuers.

Standardizing and Stabilizing

Enhanced Credibility and Trust: By adhering to MiCA’s standards, projects can demonstrate legitimacy and build trust with users. This can be particularly important for attracting institutional investors who may be wary of the unregulated crypto landscape.

A More Stable Market Environment: MiCA aims to prevent market manipulation and protect consumers. This can lead to a more stable and predictable market environment, potentially benefiting all participants.

Standardization and Growth Potential: Clearer regulations can provide a framework for the industry to grow. This can attract new projects and users, ultimately contributing to the overall expansion of the blockchain and crypto space within the EU.

Consumer Protection: The crypto space is still relatively young and can be complex for newcomers. MiCA aims to establish safeguards against scams, fraud, and misleading information. This helps protect consumers from making risky investments without proper understanding.

Combating Financial Crime: Cryptocurrencies can be used for illegal activities due to their pseudonymous nature. MiCA incorporates Anti-Money Laundering (AML) and Know Your Customer (KYC) requirements, making it harder for criminals to use crypto for illicit purposes.

Level the Playing Field: A clear regulatory framework helps establish a level playing field for businesses in the crypto industry. This fosters fair competition and discourages unfair practices.

Background Checks & Lack of Control

Increased Compliance Burden: Projects, especially CEXs, will face stricter compliance requirements. This can also involve implementing robust KYC/AML checks and maintaining strong operational resilience. These processes can be time-consuming and expensive. Also, people who got into crypto to get better control over their assets, and prefer to deal with everything themselves might find it difficult to have to adhere to such rules.

Potential for Stifled Innovation: Overly stringent regulations could potentially stifle innovation in the fast-paced blockchain space. Projects might hesitate to launch due to the complexity of adhering to regulations.

In a way, MiCA might represent a step towards a more mature and regulated crypto ecosystem in the EU. While there are challenges for projects to navigate, the long-term benefits of increased trust, stability, and potential growth can be significant. For projects that can adapt and comply with MiCA, it could be an opportunity to thrive in a more established European crypto market.

How will MiCA affect blockchain-based projects?

Besides having to obtain a license to operate, crypto asset companies will have to be part of the European Securities and Markets Authority (ESMA) list as regulated activity. This compliance measure will allow a company based in Switzerland to operate anywhere in Europe, and even open new branches.

To follow MiCA’s framework, most companies will probably have to review their internal procedures, as some things are mandatory, like validating transactions and ensuring liquidity. Companies under this new law must also adhere to global consumer protection regulations such as AML and KYC. Having a whitepaper published is yet another requirement: every crypto asset issuer must have a whitepaper published, thus explaining the why, the what, and the how of its nature.

The Parliament also passed the Regulation on Information Accompanying Transfers of Funds and Certain crypto-assets, determining that cryptographic transactions within the EU are required to include identification data, which in turn means that CEXs and other crypto trading-related companies will have to ask users and customers for personal data. This can potentially hinder the flourishing of new DeFi-related businesses, as well as their democratization amongst traders.

Overall, MiCA represents an attempt to bring more order and security to the crypto space in the EU. This can benefit consumers, and businesses, and ultimately contribute to the responsible growth of the blockchain and crypto industry. There is, however, the need to strike a balance between fostering innovation in the cryptocurrency industry and safeguarding the interests of investors, maintaining market integrity, and ensuring financial stability.

Beyond MiCA: Fighting Terrorism & Money Laundering

However, regulations affecting crypto-based projects didn’t start with MiCA. In June 2022, the EU parliament approved legislation designed to prevent illicit activities with crypto, part of the new EU anti-money laundering package. It’s basically the “travel rule” — applied to traditional financial markets — extended to the digital world. According to this regulation, “This rule requires that information on the source of the asset and its beneficiary travels with the transaction and is stored on both sides of the transfer. Crypto-assets service providers (CASPs) will be obliged to provide this information to competent authorities if an investigation is conducted into money laundering and terrorist financing.”

Criticism of MiCA

Many industry experts have already raised concerns about many points that are not clearly defined and would have to be decided in court in the worst case. This would stop many projects from further operating in the EU or starting a new venture in the EU because of the legal uncertainty. This would also stop further innovation in this space and make the EU even less attractive for startups.

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