The final vote on the European Union’s most awaited crypto regulation, known as the Markets in Crypto Assets (MiCA) regulation, was recently postponed until April 2023. This is not the first delay – before the European parliamentarians rescheduled the procedure from November. 2022 to February 2023.
However, these setbacks are only caused by technical difficulties, and as such, MiCA is still a comprehensive pan-European crypto framework. But it will only happen in 2024, while during the second half of last year, when the MiCA text was mostly written, the industry was shaken by several surprises, causing new headaches for the regulator. There is no doubt that in an industry as dynamic as crypto, the whole year 2023 will bring some new hot topics as well.
Therefore, the question is whether MiCA, with its inherent flaws, can be a true “comprehensive framework” a year from now. Or, more importantly, will it be an effective rule to prevent future failures similar to TerraUSD or FTX?
The question must be on the mind of the president of the European Central Bank, Christine Lagarde. In November 2022, in the midst of the FTX scandal, he claimed “there should be a MiCA II, which includes more goals to manage and monitor, and which is very much needed.”
Cointelegraph reached out to various industry stakeholders to understand their opinions on whether the market share in Crypto Assets is still sufficient to enable the functioning of the crypto market in Europe.
EU DeFi regulation is still a long way off
One of the main blindspots regarding MiCA is decentralized finance (DeFi). The current draft generally does not mention any of the later forms of organization and technology in the crypto space, and that could certainly be a problem when MiCA arrives. That certainly caught the attention of Jeffrey Blockinger, general counsel at Quadrata. Speaking to Cointelegraph, Blockinger envisioned scenarios for future crises:
“If DeFi protocols disrupt major centralized exchanges as a result of widespread trust in their business models, new rules can be proposed to address everything from money laundering to customer protection.”
Bittrex Global CEO Oliver Lynch also believes there is a global problem with DeFi regulation and MiCA will not make an exception. Linch said that DeFi is highly unregulated and, to some degree, even a low priority for regulators, as the majority of customers engage in crypto primarily through centralized exchanges.
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However, Linch told Cointelegraph that just because regulators can oversee and participate in the simplest centralized exchanges, that doesn’t mean there isn’t an important role for DeFi in the sector.
The lack of a dedicated section for DeFi does not mean that it cannot be regulated. Speaking to Cointelegraph, Terrance Yang, managing director at Swan Bitcoin, said that if DeFi can be transferred to the language of traditional finance, it can be regulated:
“DeFi is just a few derivatives, bonds, loans and equity financing dressed up as something new and innovative.”
Generating, borrowing and lending crypto collateral products are things that investment and commercial banks are interested in and should be regulated in the same way, believes Yang. In that way, the suitability requirements formulated in MiCA may be useful. For example, a DeFi project may be defined as providing crypto asset services in the MiCA vocabulary.
Loans and staking
DeFi may be the most famous, but it is not the only limitation of the upcoming MiCA. The EU framework also fails to address the growing crypto lending and staking sector.
Due to the recent failure of loan giants, such as Celsius, and the attention of American regulators for staking operations, EU parliamentarians also have to do something.
“The market collapse last year was driven 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 noted the specific problem of imbalance in the regulation of debt and staking in the European Union. Ironically, at this time, the crypto market enjoys an asymmetric advantage in terms of loose regulation when compared to the traditional banking system in Europe. Commercial banks or legacy investments and even “traditional” fintech companies are overregulated relative to crypto exchanges, crypto loans and staking platforms that are not regulated very much:
“Or let the free market work without regulation, except for fraud, or create the same rules for all who offer the same economic products as Europeans.”
Another issue to watch is nonfungible tokens (NFT). In August 2022, European Commission Advisor Peter Kerstens announced that, despite the absence of a definition in MiCA, it will regulate NFTs as cryptocurrencies in general. In practice, this may mean that NFT issuers will be similar to crypto asset service providers and will have to submit regular accounts of their activities to the European Securities and Markets Authority in their local government.
Cause optimism
MiCA is generally met with moderate optimism by the crypto industry. Despite some rigidities in the text, the approach seems generally reasonable and promising in terms of market legitimization.
With all the turmoil in 2022, will the next iteration of the EU crypto framework, the hypothetical “MiCA-2”, be more restrictive or crypto-skeptical? “Further delays faced by MiCA only highlight the idle approach taken by the EU to introduce legislation that is needed now more than ever, especially due to recent market events,” said Linch, demanding stricter and faster supervision of the market. .
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Lima also expects a closer approach with more issues covered. And it is very important for European parliamentarians to quickly update the regulations:
“I expect a more robust approach will be implemented in some technical standards and guidelines that are currently being worked on and will be part of the MiCA regime. We can also see more oversight by regulators in terms of authorization, approval and supervision, but the ‘crypto winter’ it will be a long time since the disbursement when the law is revised.
At the end of the day, one should not get caught up in stereotypes about the delays of the European Union’s bureaucratic machinery.
It is still the European Union, and not the United States, where there is at least one large legal document, which is scheduled to become law, and the main effect of MiCA is certainly more important symbolically, while important issues in crypto can be true. protected by less ambitious legislative or executive action. However, the mood of the action remains important – the last time we heard from the European Union, it decided to keep banks with a risk weight of 1,250% on exposure to digital assets.