What Is Market in Crypto-Assets (MiCA)?

As part of its digital finance agenda, the European Commission unveiled a proposal for a regulation on Markets in Crypto-Assets (MiCA) in September 2020. MiCA will deal with crypto-assets, including e-money tokens, utility tokens, and asset-referenced tokens not currently covered by existing laws.

The MiCA will create a legislative framework that will include both consumer protection and suppliers of crypto-asset services. A notable example of a crypto-asset service is the custody and management of crypto-assets on behalf of third parties.

While not projected to take effect until early 2024, MiCA intends to safeguard consumers and investors, boost market financial stability, and avoid impeding innovation in the crypto and Web3 sectors. Let's analyze MiCA as much as we can.

What is MiCA?

The Markets in Crypto-Assets Regulation (MiCA), which is expected to be a new EU legislation, might serve as a model for other countries looking to regulate activities linked to crypto assets.

Transparency, disclosure, authorization, and oversight of crypto-asset service providers and issuers and transactions are some of the important topics that MiCA is anticipated to address. To offer services in cryptoassets, one must have a registered office in a member state of the EU and authorization from the applicable national responsible authorities.

With the help of MiCA, the EU hopes to establish itself as a desirable location for crypto-asset service providers (CASPs) to conduct business while avoiding market manipulation and safeguarding customers from fraud, money laundering, terrorist funding, and other illegal activities.

What does MiCA mean for crypto?

There has been a clamour to hasten the regulation of crypto-assets after the collapse of FTX. When it comes to what a crypto-asset is, MiCA describes it as "a digital representation of a value or a right which may be exchanged and held electronically, utilising distributed ledger technology or equivalent technology".

Governments have expressed worries about the transparency and the oversight of cryptocurrency transactions since these payments are made outside of the clearing institutions that make up the traditional global financial system.

The development of Central Bank Digital Currencies was prompted by their recognition of the advantages of cryptocurrencies, notably for cross-border payments where transactions may be carried out virtually quickly outside of the antiquated and antiquated correspondent banking system. To provide Central Banks authority over monetary policy and to protect against the dangers of crypto-assets created by non-government entities, MiCA will not be applicable to CBDCs.

Crypto miners will also need to publish their energy usage in order to minimise the environmental effect of their operations. Several companies involved in the crypto industry have embraced MiCA since it not only gives CASPs more legitimacy and credibility but also has the ability to foster innovation.

Objectives of MiCA

MiCA will first and mainly give the EU a uniform licensing system, negating the need for national implementing laws. The fundamental goals of the proposed regulation of crypto assets are four. That are:

• Provide crypto assets legal security as current EU financial services regulations don't protect them;
• Existing national regimes for crypto assets that are not covered by current EU financial services regulation;
• Enact universal regulations at the EU level for service providers and issuers of crypto assets;
• Make stablecoins subject to certain regulations, especially if sold as e-money tokens linked to other crypto assets or financial instruments.

By regulating public offers of crypto assets, the MiCA will also "support market integrity and financial stability" and introduce measures to combat market manipulation and stop money laundering, terrorist financing, and other criminal activity. Consumers will also be better informed about the risks, costs, and fees associated with dealing with crypto assets.

Generally, MiCA is designed to assist guarantee that "the Union's financial services legislation is fit for the digital age, and contributes to a future-ready economy that works for the people".

What crypto-assets does MiCA include?

With a few significant exceptions, MiCA is generally intended to establish a regulatory framework for digital assets that use Digital Ledger Technology (DLT). Asset-referenced tokens (ART), electronic money tokens (EMT), and other crypto-assets not covered by current EU law are the three categories this is divided into.

Anybody operating in the EU that offers crypto asset services or issues crypto assets must comply with MiCA once it is in place. Providers of crypto-asset services (CASPs) with more than 15 million customers will be regulated more strictly.

Along with "traditional" cryptocurrencies and tokens like Bitcoin, Ethereum, and XRP, MiCA will also apply to a newly defined e-money token (EMT) (a token that technically isn't e-money in the traditional sense but has all the characteristics of traditional e-money and would also fall under E-Money Directive, EMD2) and stablecoins, which are classified as asset-referenced tokens (ART).

Source: IAS Academy

Under MiCA, stablecoins will be subject to greater degrees of examination. Issuers of stablecoins, a form of cryptocurrency tied to an asset like the US dollar or gold, would be subject to liquidity requirements, forcing them to demonstrate that they had sufficient reserves to prevent a collapse. The European Banking Authority will also be in charge of monitoring stablecoins.

Non-Fungible Tokens (NFT) are a type of digital asset that MiCA does not specifically address. Because NFTs may take on many forms, including avatars, artwork, music, collectibles, and tickets, so their regulatory regulation is complicated.

Central Bank Digital Currencies (CBDCs) will not be required to follow MiCA, as was already indicated. Although just three categories of crypto-assets will be covered under MiCA, as the sector develops and innovation picks up speed, loopholes in the law might start to occur.

Future Prospects for MiCA

In a recent webinar, Daniel Lee, Head of Web3 at Banking Circle, noted that while many actions in the financial services sector are already unlawful, they are not yet prohibited in the crypto space. This situation urgently needs to change. He gave other examples, such as fabricating markets, engaging in fraudulent trading, manipulating the market, and making false or deceptive comments. He thinks that more regulation to stop this behavior in the cryptocurrency industry would significantly reduce the prevalence of dishonest traders.

The same rules should apply to cryptocurrencies, Daniel added, just as different traditional financial assets are subject to various restrictions. Because various digital assets act differently and have different risks, new digital assets should be governed by new rules rather than those created for existing digital assets. A focused approach is needed for effective crypto regulation, not an all-encompassing framework.

In addition, there are other regulations that crypto firms may need to follow. France and Germany are two EU nations that have hinted at the possibility of stricter laws in the future.

Hervé Maurey, a senator for the French finance commission, called for more crypto rules after the collapse of FTX rocked the industry. Mark Branson, the president of BaFin in Germany, said that while he supports MiCA, there "has to be a global solution" for crypto regulation.

In the UK, the recently appointed chair of the Financial Conduct Authority demanded more regulation of cryptocurrencies in a meeting of the cross-party Treasury select committee. He claimed that cryptocurrency-related businesses were "deliberately evasive" and shared his opinion that the industry helped money laundering.

In the US, Senator Elizabeth Warren recently stated: "It is time for Congress to compel the crypto business obey the same money-laundering standards as everyone else" during a significant Senate Banking Committee meeting. The Securities and Exchange Commission is anticipated to be in charge of cryptocurrency regulatory monitoring (SEC). In 2023, a stablecoin law is also anticipated.

MiCA FAQs

What does crypto's MiCA stand for?

Early in 2023, the hotly contested Markets in Crypto-Assets (MiCA) Regulation is anticipated to go into effect. By providing a standardised set of regulations for crypto-assets and related activities and services, MiCA seeks to fill loopholes in the current EU financial services legislation.

What are the categories for MiCA crypto?

The following sub-categories of crypto-assets are defined by the MiCA: utility tokens, asset-referenced tokens, and electronic money tokens.

When was MiCA suggested?

The Commission initially floated the idea for MiCA in September 2020 as part of its Digital Finance Strategy, which intends to create a number of legislative measures to encourage and control the digital transformation of the EU financial sector.

Is MiCA in effect?

With the exception of being approved by the European Parliament, MiCA has successfully completed all phases of the legislative procedure for the EU. The Regulation is anticipated to be approved by the European Parliament by the end of 2022 with no opposition. MiCA will go into force in 2024 if that occurs.