MiCA – Not Good, Not Bad

Last week the EU reached an agreement on its Markets in Cryptoassets (MiCA) directive, delivering a single rule book across 27 countries and bringing years of debate on how to regulate the digital-asset industry to an informal close.

As the final step, it still needs to be approved by the Council and the European Parliament. If it ends up becoming law, it will allow for the tracking of all transactions, whether on centralized exchanges or DeFi platforms. Regulated crypto businesses would be required to obtain, store, and disclose information on people engaged in transfers when requested by the authorities.

Politicians are praising MiCA as a way of “putting an end to the crypto wild west.”

MiCA is supposed to increase investor confidence in the market with a new EU supervisory structure for stablecoins, as well as protections to guarantee crypto firms are held accountable for the products and services they provide.

To protect consumers from meltdowns like Terra-Luna, stablecoin issuers must have fully backed reserves to prevent insolvency.

Also, there is a € 200 million cap on daily transactions for stablecoins. This cap is very low when you consider the combined daily volume for USDT ($333 billion) and USDC ($260 billion), which is in the billions a day. It is also not clear how this can be enforced with crypto-backed stablecoins, such as Dai (DAI).

The Block

When it comes to regular cryptocurrencies, token issuers will have to provide whitepapers and will be liable for misleading information.

Crypto exchanges, designated as crypto-asset service providers (CASPs), will need a license and their operations will be monitored by the European Securities and Markets Authority (ESMA).

National authorities will be responsible for supervising crypto companies and the assets they issue or handle. These authorities must, however, share the data they collect on crypto companies that have more than 15 million users with the EU’s securities regulator. Also, MiCA will come with a blacklist. ESMA will name and shame any crypto companies that fail to comply with the new rules and put them on a roster as a warning to investors. The red-flag criteria can go beyond a failure to comply. A company that refuses to register in a country or makes a conscious effort to operate outside legal structures can also land on the blacklist, while shady board members are sufficient grounds to get a company into trouble.

When a crypto asset changes hands, information on both the source and the beneficiary would have to be stored on both sides of the transfer, according to the new rules. All transactions must be traceable to real identities and CASPs would have to hand this information over to authorities investigating criminal activity such as money laundering or terrorist financing.

This tracking of transactions falls under the transfer of funds regulation (TFR), the EU’s anti-money laundering framework.

TFR does apply to transfers from non-custodial wallets to CASPs. For under 1k Euro transfers, and if the wallet doesn’t belong to a CASP client, the TFR tracking is not mandatory. Otherwise, CASP will have to verify the ownership of the wallet, somehow.

Non-fungible tokens, digital tokens that represent unique works like art, have been excluded from the rules unless they fall under existing categories of crypto assets. The EU said that, unlike cryptocurrencies, digital assets, which can represent artwork, sports memorabilia, or anything else that can be digitized, are unique and sold at a fixed price. But it left room to reclassify them later as crypto assets under MiCA or as financial instruments.

Overall, MiCA is a mixed bag.

MiCA left some leeway and TFR doesn’t apply to P2P transfers, from one non-custodial wallet to the other. The rules will help novice crypto investors avoid falling victim to frauds and scams that regulators have warned are widespread in the industry. That’s a huge benefit, especially for someone who has no idea where to go or what to invest in. Another good thing is that once a cryptocurrency firm is licensed in one EU state, under MiCA it gets a European passport. The company could set up operations in another EU nation without the need to obtain additional licenses from the local government.

However, there are a lot of unnecessary restrictions to keep money flowing into DeFi, requiring EU stable coins to institute a daily transaction volume cap, eroding European user privacy, and making the experience of crypto exchanges based in Europe a little bit worse. Once ESMA’s day-to-day enforcement goes live, we’ll have a better picture of how all this will play out.

by Ilias Louis Hatzis is the founder and CEO of Kryptonio wallet.

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