New rules on markets in cryptoassets (MiCA) were adopted by the EU’s Council last month. This is a significant – and positive – development which brings a firm regulatory framework to the crypto sector in Europe for the first time. Its introduction also puts pressure on other countries to introduce similar regulation in the coming years.
Evan McGookin and Chris Vaughan from fscom’s financial crime team discussed MiCA on a recent episode of our podcast, Partners in fincrime. In this blog, we summarise their expert analysis of the new rules.
MiCA: regulatory certainty with a wide application
MiCA brings regulatory certainty to an industry which has historically had very little oversight. When cryptoassets were first launched, they were completely unregulated, although cryptoasset firms (known as VASPs) in the UK and EU have since had to adhere to their regulators’ money laundering regulations.
MiCA goes a step further than these regulations by applying a proper regulatory framework to cryptoassets themselves. The new rules have a wide application which covers the following:
- Most cryptoassets, including tokens and stablecoins.
- Trading venues.
- Wallets where cryptoassets are held.
- Although a notable exception is decentralised financial services (DeFi).
Importantly, the new rules allow passporting. This means that, when a cryptoasset firm registers in one EU country, it can then serve customers in every EU country.
MiCA is a direct regulation rather than a directive. This gives it sharper teeth because it will apply to all EU27 states with no room for regulatory arbitrage. The regulation is moving quickly: the European Parliament voted in favour of it on 20th April, the European Council approved it on 16th May, and firms are likely to have until late 2024 or early 2025 to comply with its requirements.
MiCA brings benefits to cryptoasset firms, customers and investors
The EU says MiCA is part of its aim to “develop a European approach which fosters technological development and ensures financial stability and consumer protection”. The rules are designed to “support market integrity and financial stability by regulating public officers of cryptoassets”.
This should benefit all stakeholders involved in the crypto sector:
- Consumers will feel more protected from financial crime thanks to better safeguarding requirements for their cryptoassets. MiCA includes the establishment of a public register of non-compliant cryptoasset service providers (CASPs), which will help consumers decide who to use – and who to avoid.
- Investors will feel similar security from enhanced regulatory scrutiny of the sector, which will help to mitigate risks that became apparent after the collapse of several crypto firms in recent years.
- Cryptoasset firms in Europe are likely to be more attractive as a destination for financing and investment compared to their less regulated peers and receive greater financial inflows. The regulation might even persuade large institutional investors to move into crypto for the first time. This can only benefit the sector in Europe and drive further innovation in the market.
Early responses to MiCA suggest it could become the global template for how to regulate cryptoasset services. Recent data revealed that the share of VC investment into crypto projects in Europe increased by more than ten times from Q1 2022 to Q2 2023. This will not all be explained by the prospect of MiCA, but it certainly reflects the positive effect of regulatory clarity.
Further regulation expected as global crypto industry matures
MiCA complements existing EU regulations, directives and rules which require financial services companies to manage financial crime risk. It complements the Digital Operational Resilience Act (DORA), which is due to come into force shortly, and the EU’s travel rule. Taken together, these developments apply the EU’s high standards for compliance in financial services to the broader crypto sector.
The US, UK and the rest of the world are likely to follow MiCA’s lead in order to stay competitive and attractive as a destination for investment and innovation in cryptoassets. Prior to MiCA, Dubai was the only market in the world to give clarity over the regulatory outlook for cryptoassets.
The regulatory stance is more confusing in other jurisdictions. The US Securities and Exchange Commission (SEC) has taken a negative stance on a lot of cryptoassets. While the UK government has talked about becoming a global hub for innovation and investment in crypto, but the FCA’s approach to supervision and registration of VASPs is under-developed. MiCA is likely to catalyse a global trend towards regulation of the sector.
Three or four years ago, most people were buying Bitcoin in unsupervised and unregistered exchanges. But three or four years into the future, every exchange may need to be authorised by national competent authorities working to a common regulatory rulebook. It’s an exciting time for the crypto sector, and companies must follow developments closely – both to ensure compliance with new rules, and to take advantage of the opportunities they offer.
To discuss your management of financial crime risk and cryptoassets, contact fscom today.