The EU’s Markets in Crypto-Assets Regulation is just a few weeks away but is it a case of too little, too late for a fledgling market already in disarray? asks Peter McGuigan
In a few weeks, the EU’s long-awaited Markets in Crypto-Assets Regulation (MiCA) will come into force, following agreement by EU policymakers last year.
Once formally enacted into EU law, the clock will start ticking for European issuers of stablecoins and crypto asset service providers (CASPs), who will have 12 months and 18 months, respectively, to prepare for implementing the new requirements.
In many ways, MiCA is another example of the EU’s determination to be at the forefront of shaping the regulatory framework for digital or data-related industries – like the EU General Data Protection Regulation – while striving to further develop its overarching policy objective of “open strategic autonomy”.
At its core, and similar in some ways to other pieces of financial regulation, MiCA aims to create a “risk-based regime” that balances consumer and investor protection, financial stability and monetary sovereignty concerns, whilst supporting innovation within the EU.
Perhaps most importantly, it will also create legal certainty for crypto providers seeking to develop their activities in the EU.
Concretely, MiCA’s objectives will be operationalised through specific rules for issuers of both unbacked crypto assets and stablecoins. These rules cover authorisation, issuance, disclosure, governance, capital and own fund requirements, to name a few.
The regulation also lays down a harmonised framework concerning CASPs, such as wallets and exchanges. CASPs will now be required to seek an authorisation in the EU before they can offer their services and will have to adhere to bespoke governance and satisfy market abuse regulation.
Can MiCA stabilise the crypto market?
Since the collapse of FTX in the US last year and wider crypto volatility, views continue to be split between those who argue that the industry should be prohibited or pushed to failure, and others who advocate in favour of developing robust requirements to effectively bring it under the purview of financial regulators.
The reality, as recently outlined by the Governor of the Central Bank of Ireland, Gabriel Makhlouf, is that the crypto industry is not going away, and that it is therefore sensible to put in place a set of industry-specific rules designed to support innovation and protect consumers.
It is, of course, difficult to determine with exact precision if MiCA could have completely prevented recent failures in the crypto market.
There is, however, a strong case to be made that it would have provided much more robust oversight and transparency for supervisors – enabling them to react and identify areas of concern much sooner.
In tandem, rules concerning the segregation of client funds and crypto assets, enhanced disclosure requirements and stricter requirements on conflicts of interest – as envisioned by MiCA – would have undoubtedly made the sector more resilient in a time of stress, and discouraged misconduct.
Despite these positive provisions, it remains to be seen whether MiCA can curtail future upheavals in the crypto market and keep pace with rapid technological innovation. Arguably, two areas will be crucial to the success of the framework:
- The need for a globally co-ordinated approach to regulation so that failures in other markets are not transmitted into the EU as a result of interconnectedness;
- That EU policymakers are able to produce useable technical standards and guidelines to support MiCA’s application in practice.
Policymakers push for alignment
Positively, at a global level, policymakers – through the Financial Stability Board and the Basel Committee on Banking Supervision – are already working on producing more horizontal principles and requirements for the sector.
Last year, for example, the Basel Committee published its position on the prudential treatment of banks’ exposures to crypto assets, while discussions are also ongoing among EU policymakers about how risk weights might be assigned to the asset class before the global standards are in place.
However, whatever capital requirements are assigned within the EU, it will be crucial that they are aligned with global standards in order to preserve a level playing field.
Work on MiCA’s technical standards and guidelines is expected to begin later this year, before supervisors need to enforce the rules in mid-2024 and early 2025.
As the legislation is a regulation, it should remove most of the risk of regulatory arbitrage within the EU, but it is crucial that all Competent Authorities take a harmonised approach with respect to licensing application processes.
This is especially important as existing Virtual Asset Service Providers (VASPs), which fall under national frameworks, will need to transition to the pan-EU regime.
Comments made in May by the US Securities and Exchange Commission’s Hester Peirce acknowledge that the US risks falling behind Europe without clear crypto rules.
Ultimately, time will tell if MiCA is a success or not, but at least the EU has been the first jurisdiction globally to identify the risks and opportunities presented by the crypto asset sector. This regulation sets a solid basis on which to further build upon.
Peter McGuigan is Head of EU Affairs at the Banking & Payments Federation Ireland
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