While cryptocurrency regulation has been a hot topic for quite a while, it wasn’t until last year that governments around the world began taking a bigger interest in regulating the booming crypto market.
El Salvador accepting Bitcoin as legal tender last September further ignited this interest. The MMF went on to warn the country that a lack of regulation in the space could have a detrimental impact on its financial system. The White House is expected to come out with its own set of cryptocurrency laws in the following weeks. Even Russia’s President Vladimir Putin urged the country’s central bank to consider regulating the crypto industry instead of instating blanket bans on trading.
However, regulation for the sake of regulation won’t do much to help the industry grow.
The decentralized and global nature of crypto and blockchain companies makes it hard to comply with regulations in each and every state they operate in.
This is what the European Union’s upcoming bill aims to solve.
Borderless business for crypto companies in the E.U.
The E.U.’s Markets in Crypto Assets (MiCA) framework was originally proposed back in 2020 as part of the European Commission’s Digital Finance package. And while it took the better part of 2021 for the European Council, the European Central Bank (ECB), and the European Data Protection Supervisor to greenlight the proposal, we could see it ratified in the European Parliament as early as this quarter.
In its latest report, analytics company CoinShares notes that the MiCA negotiations are more likely to be completed by the middle of the year, given the complexity of the European Union’s legislative process.
If ratified, MiCA could officially commence in the summer of 2024, transforming Europe’s regulatory landscape to benefit the crypto industry.
What makes MiCA so significant for the crypto industry is the fact that would effectively remove the need to comply with local regulations. Despite all being under the same umbrella of the European Parliament, none of the E.U.’s member states have the same tax and legal system. This means that a company that wants to operate in the broader E.U. market currently has to comply with 27 different legal systems, many of which still don’t recognize cryptocurrencies as an asset class.
MiCA offers a universal operating license to crypto companies that meet the standards it prescribes. With a license issued under MiCA, crypto companies would be able to operate in any European Economic Area country, even if they don’t meet all of the standards of each of the country’s legal systems.
A license issued under MiCA would act almost like a universal passport, providing companies and projects in the E.U. with a borderless business environment.
The pros and cons of MiCA
There are many things that make MiCA unique in the regulatory space. Aside from being a rather innovative way to deal with regulation in a fragmented union of countries like the E.U., it’s also one of the first proposals to recognize four different types of digital assets—payment tokens, asset-referenced tokens, utility tokens, and e-money tokens.
The proposed legislation won’t apply to CBDCs or security tokens, which are already subject to existing E.U. regulation.
With clear definitions of what each of the token categories encompasses, MiCA would provide companies operating in the E.U. with a very transparent regulatory environment. It will also make it easier for companies registered in a European Economic Area country to expand their business to the rest of the region.
Many global crypto companies, most notably crypto exchanges, have welcomed this all-encompassing bill and are looking forward to a more straightforward regulatory environment.
However, MiCA comes with a long set of shortcomings.
The legislation was clearly drafted right after Facebook unveiled its plans to launch the controversial Libra token, later rebranded to Diem. Its definition of an asset-referenced token seems specifically designed with Libra in mind and introduces regulation that many believe will negatively affect all fiat-backed stablecoins as well.
Another major issue with MiCA is blindness to the DeFi space. The incredibly slow and complex process of drafting legislation like this in the E.U. means that its regulators have a hard time keeping up with the market. With the DeFi industry growing exponentially, any law that the European Parliament might propose now would take years to implement, making it essentially obsolete.
Nonetheless, the fact that the European Union is proactively trying to regulate the industry is an overall positive development. Despite the increased cost of compliance, we can expect crypto companies to seriously consider expanding their operations to the EEA. With more and more large markets such as Russia and India actively standing in the way of innovation in the blockchain and crypto space, a tightly regulated but transparent environment like the E.U. could make the region a new blockchain hub.
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