https://www.coindesk.com/policy/2021/11/02/unpacking-europes-looming-mica-crypto-regulation/
The European Union's cryptocurrency regulation is coming soon. (Thierry Monasse/Getty Images)
It’s often said that financial regulators are always fighting the last war. The European Union’s soon-to-be-ratified package of cryptocurrency regulations offers a telling example.
The Markets in Crypto-Assets (MiCA) framework devotes a full 26 of its 168 pages to a subcategory it calls “asset-referenced tokens.” These are a type of stablecoin, or cryptocurrency designed to hold its value, but unlike dollar-pegged stablecoins such as USD coin (USDC) or tether (USDT), asset-referenced tokens are backed by a basket of different fiat currencies, commodities or crypto assets. The most famous example has not been issued, and likely won’t be anytime soon.
That coin, of course, is the original vision of libra, Facebook’s proposed digital currency that provoked a global government backlash after its unveiling in 2019. The project was later renamed diem, and the consortium behind it watered down the design to a simple dollar-backed stablecoin.
“It’s quite obvious and apparent that the whole proposal was drafted with the libra project in mind,” said Patrick Hansen, a contributor for RegTrax, Stanford University’s working database on fintech policy.
Meanwhile, MiCA is mum about the torrid decentralized finance (DeFi) market, where global investment has swelled 360% since September 2020 (the month the European Commission introduced the proposed framework) to $96 billion as of Oct. 18 of this year.
Despite being dated on arrival, the proposed framework would dramatically simplify expansion for crypto businesses throughout the 27-nation EU. Once a crypto firm is licensed in one EU member state, under MiCA, that license would become “passportable,” meaning the firm could set up in another EU nation without having to obtain approval or additional licenses from the local government.
“If there would be an overarching regulation from the EU, that would help a lot. Because then you would have one license to rule them all,” said Eric Demuth, co-founder and CEO of Bitpanda, a Vienna-based cryptocurrency startup which was recently valued at $4.1 billion.
Introduced in September 2020 by the European Commission, the EU executive branch responsible for proposing and enforcing laws, the MiCA framework is one part of a larger Digital Finance strategy that aims to adapt Europe for the digital age.
For instance, the U.S. has introduced numerous bills in the last few years that directly affect the crypto space, from tax requirements to securities law, while different states may have their own regulatory requirements. However, the country has no real comprehensive equivalent to the EU’s MiCA. Its most comprehensive bill on crypto regulation was proposed in August. Meanwhile, China banned crypto trading and mining outright earlier this year, while working on its own government-issued digital currency.
Eva Kaili, a member of the European Parliament since 2014, and a proponent for innovation-friendly regulation of blockchain applications, said that the EU is trying something different with MiCA during an interview with CoinDesk.
“The nature of the European Union is different. We have 27 different member states with different legal and tax systems that are not harmonized. So we are trying to adopt a unique approach to policy making with this file,” she said.
MiCA encompasses cryptocurrencies like bitcoin and ether broadly, along with stablecoins. But as it is, the proposed framework would not apply to digital currencies issued by central banks (CBDCs) nor crypto assets such as security tokens that might qualify as financial instruments like securities, deposits, treasury bills or derivatives.
Even though the promise of a passportable license for crypto asset service providers sounds exciting for established crypto firms looking to set up in the region, industry players are also concerned about how MiCA will influence the digital asset market in the EU in other ways.
For instance, Martin Erhold, regulatory specialist at Bitpanda, said that even though legal certainty will likely attract institutional investment, overregulation could crowd out innovation and entrepreneurs. In addition to strict rules for crypto issuers, under MiCA, firms will have to register in the EU and bear the compliance costs or be banned, he said.
“Successful service providers will reap benefits of the larger EU single market and the market consolidation is expected. However, too high barriers to EU market entry may deter third-country service providers and issuers from entering the EU, risking decoupling EU from other innovative markets,” Erhold said in an email.