The final vote on the European Union’s much-anticipated set of crypto rules, known as the Markets in Crypto Assets (MiCA) Regulation, took place recently. postponed to April 2023. It was not the first delay – previously European lawmakers rescheduled the move from November 2022 to February 2023.
However, it was only technical difficulties that caused the failure, which is why MiCA is still on track to become the first comprehensive pan-European cryptographic framework. But that won’t happen until 2024, while during the second half of last year, when the MiCA text was largely written, a series of upheavals rocked the industry, creating new headaches for regulators. There is no doubt that in such a dynamic industry as cryptocurrencies, the whole year 2023 will also bring new hot topics.
So it’s questionable whether MiCA, with its pre-existing imperfections, could qualify as a truly “comprehensive framework” in a year’s time. Or, more importantly, will it be an effective set of rules to prevent future failures like TerraUSD or FTX?
These questions must have appeared in the mind of the President of the European Central Bank, Christine Lagarde. In November 2022, in the midst of the FTX scandal, she he claimed “There will need to be a MiCA II that covers more broadly what it aims to regulate and oversee, and that is very much needed.”
Cointelegraph reached out to a number of industry stakeholders to get their views on whether the regulation of Markets in Crypto Assets is still sufficient to allow the proper functioning of the cryptocurrency market in Europe.
EU DeFi regulations are still a long way off
One of the main blind spots with respect to MiCA is decentralized finance (DeFi). The current proposal generally lacks any mention of one of the later organizational and technological forms in the crypto space, and could certainly become a problem when MiCA arrives. That certainly caught the attention of Jeffrey Blockinger, Quadrata’s general counsel. In an interview with Cointelegraph, Blockinger envisioned a future crisis scenario:
“If DeFi protocols disrupt major centralized exchanges due to a widespread loss of confidence in their business model, new rules could be proposed to address everything from money laundering to customer protection.”
Bittrex Global CEO Oliver Lynch also believes that there is a global problem with DeFi regulation and that MiCA will not be an exception. Lynch said DeFi is inherently unregulated and to some extent even a low priority for regulators because most customers deal with cryptocurrencies mainly through centralized exchanges.
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However, Lynch told Cointelegraph that just because regulators can most easily oversee and engage with centralized exchanges doesn’t mean DeFi doesn’t play an important role in the sector.
Not having a separate section dedicated to DeFi does not mean that it is impossible to regulate it. In an interview with Cointelegraph, Terrance Yang, CEO of Swan Bitcoin, said that DeFi is to some extent transferable to the language of traditional finance, and thus is regulated:
“DeFi is just a bunch of derivatives, bonds, loans and equity financing disguised as something new and innovative.”
Yang believes that yield-bearing, lending and lending of collateralized crypto products are things that investment and commercial banks are interested in and should be regulated similarly. In this way, the suitability requirements formulated in MiCA can be really useful. For example, DeFi projects can potentially be defined as providing services of cryptographic assets in the MiCA vocabulary.
Loans and bets
DeFi may be the most notable, but certainly not the only, limitation of the upcoming MiCA. The EU framework also does not address the growing crypto-lending and betting sector.
Given the recent failure of credit giantslike Celsius, and the increasing attention of US regulators to betting operations, EU lawmakers will also have to come up with something.
“The market collapse in the last year was caused by poor practices in this space, such as weak or non-existent risk management and reliance on worthless collateral,” Ernest Lima, partner at XReg Consulting, told Cointelegraph.
Yang drew attention to the particular problem of the imbalance in the regulation of loans and betting in the European Union. Ironically, at the moment it is the crypto market that has an asymmetric advantage in terms of loose regulation compared to the traditional banking system in Europe. Legacy commercial or investment banks and even “traditional” fintech companies are over-regulated compared to arguably heavily under-regulated crypto exchanges, crypto lending and betting platforms:
“Either let the free market operate without any regulation, except maybe for fraud, or make the rules the same for everyone offering the same economic product to Europeans.”
Another issue to watch is non-fungible tokens (NFTs). In August 2022, European Commission advisor Peter Kerstens revealed that despite the absence of a definition in MiCA, there will be regulate NFTs as cryptocurrencies in general. In practice, this could mean that NFT issuers will be put on par with crypto-asset service providers and will have to submit regular reports on their activities to the European Securities and Markets Authority in their local governments.
Reason for optimism
MiCA has been met with mild optimism in the crypto industry. Despite a few inflexibilities in the text, this approach seemed generally reasonable and promising in terms of market legitimization.
With all the commotion in 2022, will the next iteration of the EU’s cryptographic framework, the hypothetical “MiCA-2,” be more restrictive or cryptosceptic? “The further delays faced by MiCA have only highlighted the EU’s lax approach to implementing legislation that is needed now more than ever, particularly given recent market events,” said Linch, arguing that tighter and faster market scrutiny is needed. .
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Lima also envisages a closer approach with more covered issues. And it is really important for European legislators to keep pace with regulatory updates:
“I expect a more robust approach will be taken with some of the technical standards and guidelines currently being worked on that will be part of the MiCA regime. We could also see more scrutiny from regulators around approval, approval and oversight, but the ‘crypto winter’ will have long since thawed by the time the legislation is reviewed.”
At the end of the day, one should not get bogged down in stereotypes about the delays of the European Union’s bureaucratic machinery.
It is still the EU, and not the United States, that has at least one major legal document set to become law, and the main effect of MiCA has always been far more important symbolically, while pressing issues in crypto could actually be covered by less ambitious legislative or executive acts. However, the spirit of these actions remains crucial – the last time we heard from the EU, it decided to do so impose a 1,250% risk weight on banks on their exposure to digital assets.
