On March 14, 2022, the world watched the European Committee on Economic and Monetary Affairs vote on the contents of the MiCA legislation. Experts, pundits and industry insiders anxiously awaited the release of this draft.
After a few hours, the news broke: the proposed MiCA legislation would indeed go forward. However, a major clause which would have seen the ban of Bitcoin in Europe was removed. The proposal was leaked back in September 2020, giving the crypto industry a glimpse of what was coming.
It is expected that MiCA will take up to four years to be formally adopted into EU legislation. As we await the actual implementation of the bill, there is an important question to ask: how did we get here, and why is this important for the fintech industry?
Before we begin asking such questions, let us take a closer look at the MiCA legislation itself.
What is MiCA?
The Markets in Crypto Assets (MiCA) draft legislation was first introduced in 2020. Its primary goal is to provide legal certainty and regulate crypto assets (cryptocurrencies, security tokens and stablecoins) in a similar fashion to the existing Markets in Financial Instruments Directive (MiFID), a legal framework for trading venues, market securities and investment intermediaries.
It is important to note that there is an emphasis on the use of stablecoins in Europe, which are defined as asset-referenced or e-money tokens.
The 168-page document comes as a part of the European Commission's expansive new Digital Finance Package that is set to transform the European economy in the coming years. Part of this new Package is to improve the competitiveness of the fintech sector and technologies to help reduce risk and increase financial stability too.
Why is MiCA Relevant to RIDDLE&CODE?
As a Web3.0 company, RIDDLE&CODE's products are based on blockchain technology and touch upon the easy, sustainable accessibility and mobility of crypto assets. With our extensive experience with blockchain frameworks, we have taken part in projects such as the European Blockchain Services Infrastructure PCP and other industry initiatives.
As we continue developing the necessary tools and infrastructure to prepare companies for a digital future, it is evident that regulations are required. Therefore, it is vital that a secure, standardised network is established with a clear set of guidelines so that companies can be easily and quickly onboarded to web3.0.
The MiCA Regulation provides the information needed to help prepare transitioning companies and the industry as a whole to adapt to the digital age within the scope of the law. While the legislation solely focuses on EU nations, it can be used as a blueprint by organisations that await their respective governments to do the same.
MiCA is currently the most extensive regulation on crypto assets in the world. MiCA is a reaction to the volatile, fast-developing trajectory of the crypto market. The industry needs regulation to prevent market manipulation and protect both businesses, especially startups and customers.
The idea of MiCA is to introduce a set of regulations that can be further developed as the crypto space expands. This will give companies a clear picture of where regulation is headed so that when the laws are put into place, they are ready.
Furthermore, standardised crypto laws in all 27 member states will make Europe more attractive to foreign companies. MiCA aims to support diverse, local players in the crypto market so that everyone can make the most of this emerging industry and offer their services to the European market.
This is why RIDDLE&CODE strongly believes that regulation is necessary for the continued innovation and expansion of digital technologies. We have always made sure that all our products are regulatory compliant. A cornerstone in developing the Token Management Platform (TMP) was ensuring that it allows our customers to operate in regulated environments. Additionally, the TMP has a licence from FMA, the financial market authority in Austria. This means that RIDDLE&CODE FinTech Solutions is a registered crypto custodian recognised by FMA, ensuring that we can issue, trade, exchange, and offer the custody of utility tokens.
Implications for the Crypto Industry
Most crypto assets that had been previously unregulated, such as digital currencies and security tokens, fall within the scope of MiCA. The legislation specifically targets the following:
- Asset-referenced tokens
- E-money tokens
- Utility tokens
Undoubtedly, the MiCA initiative will affect the ability to diversify portfolios by developing crypto strategies. However, this does not mean it plans to limit portfolio options for businesses or individuals.
The regulation has been put in place to create a robust legal framework. This way, it will be possible to include safeguards to protect both service providers and customers. It is also expected that market players will have to observe certain environmental, social and governance (ESG) standards.
Response of the Industry
One of the biggest concerns of the crypto industry was the potential ban on Bitcoin. The original suggestions included a clause requiring cryptocurrency providers to comply with environmental sustainability standards, banning the mining of proof-of-work (PoW) cryptocurrencies. The concern was that this decision would have led to a ban on such digital currencies throughout the continent.
But on March 14, this part of the report was dropped. Instead, the MiCA regulation went ahead with a focus on crypto assets and market stability. Members of the European Parliament have welcomed industry stakeholders to discuss the upcoming legislature.
Requirements for a Crypto Provider
As per the MiCA legislation, crypto suppliers must fulfil certain obligations. This includes:
- Possessing the authorisation to issue crypto assets
- Complying with prudential rules for marketing crypto assets
- Publishing a whitepaper to explain the objectives, risks and expected outcomes of certain projects
- Behaving honestly and professionally, especially when dealing with conflict and preserving and maintaining security protocols
It is important to note that, under the MiCA regulations, crypto asset service providers will be licensed to provide crypto assets. They will have to meet some criteria to do so. As previously noted, the proposals align with MiFID and market abuse laws. Thus, highlighting the importance of trust and security in the digital finance space.
What To Expect?
The MiCA legislation shouldn't come as a surprise to the crypto industry. Government regulations are bound to create a safer, regulated environment where market players can expect to be treated fairly.
In the words of Mairead McGuinness, the EU's commissioner for financial services: "Anything that is growing and not regulated can cause enormous problems if we don't get to grips with it."
Therefore, the European Commission's decision to look at crypto assets, which have been largely ignored by most legislatures, creates a path to uniformity and security for further development of crypto asset applications It is important to note that non-fungible tokens (NFTs) were excluded from the proposals. The EU Commission will determine whether NFTs require their own regime over the next 18 months.
On June 29, 2022, regulators also agreed on measures to reduce the anonymity of certain crypto transactions to combat the exploitation of crypto assets. Additionally, transfers related to unhosted wallets are expected to be reported to the authorities if the amount exceeds a daily threshold of €1,000.
MiCA is the first major attempt at establishing regulation for crypto assets in the world. Some of its stricter regulations have raised some alarms in the crypto world. Still, most industry insiders view it as a step in the right direction.