The long-awaited EU Markets in Crypto-Assets Regulation (MiCA) was finally passed on May 16th.
Although the proposal had already been voted through by the European Parliament on April 20th, it wasn’t until May 16th that the MiCA legislation was unanimously approved by the EU Council of 27 countries, marking the world’s first comprehensive and clear framework for a unified virtual asset regulatory mechanism.
Currently, global crypto regulation is floating around like a floating duckweed, with crypto powerhouses like the United States wavering between the SEC and CFTC, while Singapore, India, Japan, and South Korea are still exploring their regulatory options. Despite favorable policies in Hong Kong, its independence is increasingly being called into question.
Against this backdrop, the EU’s move undoubtedly sets a typical example for global virtual asset regulation and has significant milestone significance. Moreover, this regulation marks the beginning of compliance in the virtual asset space taking center stage on the world stage, with legal certainty driving rapid development in the crypto field.
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Why the EU?
After the passage of this legislation, many people wonder why. In fact, in the global crypto market, Europe is not a major player, with a lower market share than Asia and North America. According to CryptoComBlockingre’s December 2022 exchange review report, European exchanges account for 5.4% of monthly trading volume in global exchanges, lower than Asia (83.3%) and North America (10.6%), but it is Europe that is taking the lead in launching a crypto framework.
From a historical perspective, European crypto regulation has gone through a phase of exploration to in-depth understanding:
The exploration phase began in 2015, when cryptocurrencies were rapidly developing, but the main market was led by China. At that time, Europe was skeptical about the nature of crypto assets. The European Court of Justice ruled that cryptocurrencies such as Bitcoin were not financial instruments but legal tender, so they did not need to pay Value Added Tax (VAT).
This situation continued until 2018, when the European Commission issued the Fifth Anti-Money Laundering Directive (5AMLD), which brought crypto asset service providers (CASP) into the scope of anti-money laundering and counter-terrorism financing regulations, requiring them to conduct customer due diligence, report suspicious transactions, and retain transaction records.
Under this directive, EU member states have begun to divide, with countries such as Germany, Austria, Malta, and Lithuania leading the way in opening up proprietary virtual asset licensing systems. Some countries monitor the cryptocurrency field mainly through anti-money laundering measures, while others have completely unregulated areas. The regulatory situation is fragmented and chaotic, and institutions need to apply for compliance licenses or supervision in different countries. Due to the universality of EU licenses, this brings about rent-seeking space for regulation, and areas such as Lithuania that are relatively easy to obtain licenses have become the main focus of institutions such as exchanges.
In 2019, the European Banking Authority (EBA) released a report stating that due to the fact that cryptocurrency assets are largely beyond the jurisdiction of EU law, while also posing significant consumer protection and money laundering risks, the committee should take action. After Libra sparked controversy over private and legal currencies, the EU continued to cautiously regulate cryptocurrencies and decided to use them first in the formulation of technology regulatory standards.
In September 2020, the European Commission proposed the “Regulatory Framework for Cryptocurrency Markets” (MiCA) and the “Digital Operations Flexibility Act” (DORA), aimed at establishing a unified regulatory framework for cryptocurrency assets and cryptocurrency asset service providers, regulating the classification, definition, issuance, trading, supervision and other aspects of cryptocurrency assets, and requiring cryptocurrency asset service providers to comply with higher technical and operational standards.
In June 2021, the European Commission issued the “Sixth Anti-Money Laundering Directive” (6AMLD), which further expanded the scope of money laundering and terrorist financing charges, and increased the punishment for conspiracy crimes, environmental crimes, tax crimes, and so on.
With the improvement of regulations and the development of the cryptocurrency market, the penetration rate of the EU market is also constantly improving. According to the Chainalysis 2022 Global Cryptocurrency Adoption Index, the EU ranks fourth among 154 countries and regions worldwide, second only to Vietnam, India, and Pakistan. Against this background, in October 2022, the European Parliamentary Committee passed the MiCA Act and the amended “Funds Transfer Regulation” (TFR), which requires cryptocurrency asset service providers to provide the identity information of the transferor and payee when transferring cryptocurrency assets, in order to facilitate tracking and monitoring of suspicious transactions.
In April 2023, the European Parliament will hold a final vote on the MiCA bill and formally incorporate it into EU law.
Throughout the entire development process, as the understanding of the cryptocurrency field gradually deepened and the market pushed for it, the EU’s emphasis on regulatory requirements continued to increase. After the Libra incident, the increase in regulatory demand, the absence of unified regulations, the detachment of existing norms, and the maintenance of a dominant position all led to the proposal of MiCA by the EU. However, more importantly, the current market situation of small share and high adoption reduced the resistance to the construction of the European cryptocurrency regulatory mechanism, which was particularly evident in the United States, where the two major regulatory agencies competed for control of the industry.
MiCA’s scope of application
From the scope of application, the main types of cryptographic assets covered by MiCA are divided into four categories: traditional cryptographic assets, asset reference tokens, electronic currency tokens, and other cryptographic assets.
Cryptographic assets are the most intuitive category for users, which can be transmitted and stored electronically using distributed ledger or similar technologies, and have digital representations of value or rights, such as BTC and ETH.
Asset reference tokens (ARTs), as the name implies, maintain stable value by referring to the value of several legal tenders, one or several commodities, one or several cryptographic assets, or a combination of the above. This category includes all cryptographic assets that do not meet the “electronic currency token” criteria, and the key determinant is that ARTs are based on the value of legal tender to maintain stability. Taking Digix (DGX) as an example, a typical asset reference token, it is backed by an equivalent amount of physical gold stored in a vault.
Electronic currency tokens (EMTs), the difference between ARTs and EMTs lies in the configuration of the basic assets that support the price. ARTs use non-cash assets or a basket of currencies, while EMTs are more similar to the concept of electronic currency as they mostly use a single currency.
Other cryptographic assets that are not considered ARTs or EMTs, such as “utility tokens”, are defined as providing digital access to a certain commodity or service, provided on a DLT and only accepted by the issuer of the token. Unlike security tokens, they are not considered a financial instrument in most countries and only need to comply with anti-money laundering rules to be used.
It should be noted that MiCA does not directly include NFT and DeFi fields, but according to industry insiders’ analysis, NFTs issued in large series and collections will also be included in the scope.
Dividing regulatory entities, at the EU level, the European Banking Authority and the European Securities and Markets Authority are the main ones, and the European Central Bank is in charge of stablecoin regulation, and designated regulatory agencies in each country cooperate with the EU level to land. It is worth noting that MiCA does not apply to the European Central Bank (ECB), central banks of each country, European Investment Bank, European Financial Stability Fund, European Stability Mechanism, and public international organizations.
For the issuers of ARTs, it is necessary to obtain the approval of the national regulatory agency in advance. The basic requirements are that the registered entity in the EU should have at least 2% of its own funds with respect to the total issuance, and have a sound risk management framework for custody, cold and hot wallet management, etc.
EMT issuers are limited to accredited electronic money institutions (EMIs) or credit institutions. Compared with ARTs, the requirements are relatively broad, and only notification obligations to regulatory agencies are required. The basic requirements are the same as ARTs, but this type of token is prohibited from providing interest to holders for the protection of monetary sovereignty. Monetary sovereignty protection runs through the above two categories. If the daily associated transaction exceeds a certain limit (1 million for ARTs, 200 million euros for EMTs), the issuer will stop issuing the token.
The heavyweight encryption asset service provider category is particularly complex, and different regulations apply to different objects. For example, traditional securities brokers do not need a license to provide encrypted brokerage services. However, in addition to this category, companies involved in encrypted custody, trading platforms, deposit and withdrawal exchanges, storage, trading orders, and asset management need to obtain CASP (crypto-asset service provider) licenses from EU national regulatory authorities.
In addition to basic requirements such as governance, asset custody, complaint handling, outsourcing, clearing plans, and information disclosure, encryption asset service providers must maintain minimum self-owned funds for life. Trading platforms are 150,000 euros, custodians and exchanges (brokers) are 125,000 euros, and other categories are 50,000 euros.
However, for encryption providers, this capital requirement is only a drop in the bucket, and other implicit compliance requirements are more difficult. Some industry insiders have expressed dissatisfaction, believing that strict regulations have increased administrative burdens and are inconsistent with the actual meaning of encryption. For example, the EU authorities require special inspections of self-custody wallets exceeding 1,000 euros ($1,097), which destroys the anonymity that encryption should have.
American “Anxiety”
Although there are still issues such as anonymous disputes, increased administrative burdens, and the lack of DeFi and NFT regulations, the overall content of this regulatory bill has initially established a complete, implementable, and transparent mechanism for crypto supervision. This not only breaks the current situation of independent national jurisdiction, establishes regulatory coordination schemes, but also creates strong conditions for consumer protection, further promoting innovation and development in the crypto field.
For crypto service providers, obtaining CASP means that they can legally provide crypto services in all 27 member states of the EU, and previously unlicensed offshore exchanges have been required to withdraw from the market, leaving a large market space for local service providers. However, on the other hand, the increase in compliance operation costs is inevitable, which will also force some exchanges to leave the EU.
It is reported that after an 18-month transition period, MiCA will be officially implemented in January 2025, but the rules for stablecoins will begin to be implemented after a 12-month transition period, and are expected to take effect from mid-2024.
The United States has been alert, and Patrick McHenry, chairman of the U.S. House Financial Services Committee, has clearly stated that the EU’s new crypto regulation MiCA puts the region in a leading position in Web3 technology, “Europeans have a technologically advanced legal path, which reflects the backwardness of the United States. We should be the world leader in technology deployment, not lag behind Europe.”
Similarly, the Hong Kong Securities and Futures Commission recently released the “Guidance on Cryptocurrency Trading Platforms”, which further clarifies the regulatory route of virtual assets and highlights the complementary regulatory patterns between the mainland and Hong Kong.
Only in terms of crypto, due to the unique technology and financial attributes, blockchain is not a competition at the level of instruments, but a comprehensive competition of systems. Whoever becomes the decision-making place of policies first will have the advantage of being the first. In this context, small regions that can flexibly turn around are naturally more advantageous than big countries. Hong Kong, Singapore, and Dubai have already begun to act, and the EU’s sudden entry has further increased pressure on the large countries that have not yet acted.
And currently the United States, which is still at the center of the power struggle, seems to be far behind by more than just one step.
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