DeutschThe new MiCA crypto law is scheduled to take effect on December 30, 2024. It is the first overarching law to regulate cryptocurrencies and the crypto industry. At the same time, it is also regarded as a global pioneer. CoinPro takes a closer look at the regulation.
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Crypto Regulation in the EU 2024: why the Regulation
The Markets in Crypto Assets Regulation, or MiCA or MiCAR for short, was adopted by the EU Parliament as early as April 2023. In German, it is referred to as the Regulation on Markets in Crypto-assets (Regulation [EU] 2023/1114).
The crypto law is scheduled to finally come into force on December 30, 2024. The authorities cited as many as 119 reasons in an official document for creating the regulation.
The EU itself claims that it primarily wants to promote the crypto and blockchain industry. Accordingly, they want to create legal certainty in order to offer developers and companies the necessary confidence. At the same time, they should have enough freedom to contribute to the “economy in the interests of people.”
Some measures are intended to help create more competition and transparency than has been customary. At the same time, investors are to be protected from fraud and market manipulation. The regulation affects almost all public digital currencies. Private digital currencies, CBDCs and NFTs are excluded.
Critics fear that the interventions by the authorities may also have harmful effects on the market, or at least intend to. The current landscape could change, especially for stablecoins and confidential cryptocurrencies.
Key Points: What Does MiCA Say?
What are the key points required by MiCA, the EU’s crypto law? The requirements can be divided into four main categories. The aim is to achieve legal harmonization in the Union.
In addition, the EU wants to improve investor protection and promote financial stability through increased regulatory controls. The ever-recurring bogeyman of terrorist financing and money laundering also appears in MiCA. New measures are intended to restrict the illegal use of cryptocurrencies.
Fraud by Crypto Exchanges and Issuers is Being Combated
Fraud by crypto exchanges and similar service providers is to be combated. The authorities are therefore making precise regulations on the management of customer funds and the provision of reserves for the services. First, they need a license to operate in the EU.
The EU wants to prevent multi-billion dollar fraud cases such as the one involving the crypto exchange FTX, which misused customer deposits for speculation and investments, from even arising.
MiCA divides crypto service providers into three categories, which must meet their own requirements in order to obtain regulatory approval. Class 1 service providers are asset managers, brokers and advisors.
Class 2 service providers correspond to swappers, money changers and custodians. Class 3 refers to classic crypto exchanges. Depending on the type, capital of between 50,000 and 150,000 euros must be invested, which will benefit customers in the event of a claim.
To ensure the reliability of the requirements, ESMA and EBA, two supervisory authorities, are used to check the service providers for correctness.
Liquidity requirements are also placed on issuers of stablecoins. In the past, the operators of the market leaders USDT and USDC in particular had come under criticism because they acquired investment products with reserves instead of investing them.
According to the Capital Adequacy Regulation, the EU authorities can require issuers to invest a reserve of up to 100 percent.
White Paper as Mandatory for Cryptocurrencies
MiCA wants to create uniform rules throughout the European Union for dealing with cryptocurrencies and the crypto industry. The law places high demands on the issuers of cryptocurrencies and on crypto service providers.
In order to offer end users more transparency, the issuers of a coin will in future be obliged to publish a white paper, thus disclosing the functions and risks of the cryptocurrency to potential users.
The information provided there should be binding. The authorities want to hold either the issuer or the person who registers the cryptocurrency for trading on an exchange responsible for this.
However, this requirement cannot be fully implemented. Outside of centralized crypto exchanges, the authorities have no way of enforcing the requirements. This loophole will take effect on decentralized trading platforms, as the authorities lack control there.
If a cryptocurrency is offered on a trading platform without a white paper, its operator is liable. The transmitter of the white paper is liable for incorrect information.
The EU requires 37 different details to be included in the white paper. This includes the issuer of the cryptocurrency, details about the currency and its business links.
Issuers of so-called asset-referenced tokens must obtain regulatory approval for the white paper. In the crypto scene, such tokens are referred to as stablecoins.
Strict Regulations for Stablecoins could Create Upheaval
The strict regulations that MiCA imposes on stablecoins could cause a significant upheaval. For example, foreign stablecoins are limited to a daily volume of 200 million euros by the crypto law.
If the transactions in connection with the use as a means of exchange exceed this total value or the number of one million transactions over a quarter, the issuer must stop issuing the stablecoin.
The issuer must then submit a plan to the authorities to comply with these requirements in the future. The restrictions can already take place if a forecast estimates that these values will be exceeded.
Since the requirements only apply to those stablecoins that map a currency that is not an official means of payment of an EU member state, the law could have a major impact on the current crypto market,
This is dominated by US stablecoins. Tether (USDT) is particularly popular with a daily trading volume of 45 billion US dollars. With this value, it could quickly fall under the EU’s requirements. The same applies to USDC with a trading volume of 6.7 billion US dollars.
A popularization of euro stablecoins is therefore conceivable, the largest representative of which, Stasis EURO (EURS), only reaches 300th place among all cryptos in terms of market capitalization. Tether already offers an even more unpopular alternative with the EURT.
Tether CEO Paolo Ardoino himself is still uncertain about the implications of the new law, as it provides for a specific purpose – the exchange – for calculating the limit.
However, it is likely that the regulations will be applied to the two market leaders USDT and USDC. These are often acquired on crypto exchanges with fiat currencies in order to then use them as a trading currency and acquire cryptocurrencies with them.
Interest on Stablecoins Prohibited
A popular use of stablecoins could be threatened by MiCA. The law prohibits issuers and crypto service providers from paying interest to customers when they invest in stablecoins. This option is also prohibited if, for example, a second token is used for remuneration.
Stablecoins have developed into a popular investment over the years, as they offer investors a reliable return. However, after MiCA comes into force, it is also conceivable that crypto lending will shift in favor of DeFi and increasingly migrate to decentralized platforms.
Privacy Coins Subject to Ban: Will the Crash Follow?
Privacy Coins (confidential cryptocurrencies) are also subject to a ban by the EU law. This expressly prohibits crypto service providers from providing such currencies within trading that have anonymizing functions.
The ban affects, for example, Monero (XMR) or Zcash (ZEC). Anonymizing coins are only excluded from the ban if the operator of the trading platform can track the transactions on the respective blockchain and identify its users.
The EU authorities justify this step with the fight against terrorist financing and money laundering. Critics suspect that this measure is intended to establish more control over the crypto ecosystem.
Specifically, the destruction of privacy coins is not to be expected. Trading will continue to take place via decentralized platforms. The price development of the affected cryptos is particularly questionable.
Strong losses are conceivable, as these coins can no longer be reached on the largest trading platforms. If organic demand continues to exist, price growth could also take place in the long term due to the decreasing accessibility. Different reactions from different projects are to be expected.
EU Provides for Identification of Crypto Users
In parallel to MiCA, the EU is introducing an amended version of the Money Transfer Regulation (TFR). This law intends to identify users when dealing with funds.
The EU also wants to increasingly identify crypto users in the future. A limit of 1,000 euros is planned for this. Users who exceed this limit with a transaction or a series of payments are to be identified by name by crypto service providers. The origin of the money as well as the clear name and location of the user will be checked.
This monitoring takes place within the framework of the so-called Travel Rule. This is an international standard that is also to be applied in most countries of the world in a similar way.
Most recently, the European Banking Authority (EBA) presented an adaptation of the TFR. Accordingly, financial authorities (FIUs) should thoroughly check suspicious transactions. FIUs can retrieve tax information, transaction data from fiat and crypto transfers, reported vehicles, customs information, registered firearms and other data of the suspicious person.
The exact details on the tightening of the EBA guidelines are not yet final.
Summary
In short, according to its own statement, MiCA wants to promote the blockchain industry in the EU. In practice, the monitoring of the industry and its users is increasing sharply. Cryptocurrencies should henceforth have uniform white papers in order to create transparency for users.
With its law, the EU is fighting leading stablecoins in order to reduce the influence of the US dollar in the European market. It is conceivable that this will increase the use of stablecoins that map the euro. Regulations are also to be made for algorithmic stablecoins.
The popular crypto lending with stablecoins is prohibited, but could shift to the DeFi sector as a result. Privacy Coins are also prohibited and crypto transactions are to be heavily monitored in the future. Users may be completely scrutinized.
Frequently asked questions about MiCA
- Does MiCA Apply to DeFi?
MiCA itself states that it does not want to regulate decentralized applications. However, some requirements still apply to systems that cannot be traced back to a single entity, such as cryptocurrencies or algorithmic stablecoins. It is unlikely that these requirements can be enforced.
- How Does the Law Protect Investors?
The crypto law is intended to protect investors through strict regulations. Service providers must manage their reserves according to specific requirements and monitor their users. The implementation of this will be monitored by EU authorities.
- Which Assets Fall under MiCA?
With the exception of CBDCs, NFTs, and private digital currencies, all digital currencies must comply with the MiCA regulation. A private currency is only used by a specific audience and is not accessible to the public.
