Last week, the EU Parliament finalized a sweeping set of rules aimed at bringing clarity and standardization to the crypto market in Europe. The Markets in Crypto Assets (MiCA) regulation is the world’s most comprehensive regulatory framework for crypto assets created to date. Its approval is a big step forward for regulatory certainty to the European crypto market, and will help reduce regulatory arbitrage among member states.
MiCA classifies crypto assets into a number of different groups, including Asset-Referenced Tokens (ARTs), E-Money Tokens (EMTs), and Utility Tokens. It includes a requirement that stablecoin issuers must be authorized by the Central Bank and meet certain regulations. Crypto asset service providers (CASPs) are also required to be authorized and follow governance and liquidity rules. MiCA does not apply to security tokens or unique non-fungible tokens (NFTs).
While it is important to see what implementation guidelines come from the European Securities and Markets Authority (ESMA), MiCA is already providing investors an important opportunity to engage with the crypto asset market. We believe this will lead to an increase in institutional adoption and exposure to these assets. Beyond the general positive of MiCA being finalized, we want to share here our team’s initial perspectives on what is good, bad, and unknown about the new rules.
More clarity: The European Union has now introduced a unified approach to crypto regulation across all 27 member states. This eliminates regulatory arbitrage among European countries and enables companies authorized in one country to passport their offerings to other EU countries.
Increased transparency: Any entity looking to publicly offer a crypto asset must produce a white paper that discloses information about the asset, including the issuer or entity looking to admit it to trading, use of proceeds for the capital raised, rights or obligations attached to the asset, underlying technology, and possible risks to investing. This white paper can be produced by either the asset issuer or the CASP offering the asset to customers.
Institutional engagement: The regulatory clarity provided by MiCA is attractive to institutional investors and traditional businesses, which will lead to more engagement in crypto-related activity and more institutional adoption and experimentation.
Better oversight: Stablecoin issuers will need to maintain a reserve backing up the stablecoins, segregated from their own assets and invested in low-risk assets. CASPs will be subject to governance and liquidity requirements, limiting conflict of interest and market abuse, facilitating due diligence and know-your-provider (KYP) procedures for crypto investment firms, while also creating a more secure environment for investors.
Standard-setting: It is likely that MiCA will have a "Brussels effect" leading other geographies to build similar comprehensive approaches to crypto regulation, with MiCA as a standard, as seen with the EU’s General Data Protection Regulation (GDPR). The US and the UK will be under more pressure to provide a similar comprehensive framework for crypto-related activities.
The bad (or not-so-great)
Too limited: MiCA does not provide guidance on some specific areas such as DeFi, staking, and lending. So the regulation is already behind the market, and CASP might find themselves dealing with uncertainty on these business lines soon. However, ESMA is expected to provide additional guidance on these areas and we are optimistic this will help provide better clarity.
Lack of fund guidance: Regarding crypto in funds, ETFs, and ETPs, while MiCA does not provide additional clarity on this, ESMA has previously issued guidance on crypto-assets in the context of investment funds.
Compliance costs: The increased cost of compliance may create a barrier to entry for new startups. This may push them to more unregulated locations.
Specificity: The actual implementation details of how MiCA should be applied will be determined by ESMA. They have said they will “announce in due time” a timeline for consulting with external stakeholders.
Regulatory overreach: There is also a concern that the white paper obligation in particular may lead to regulatory overreach. While a standardized and substantive white paper is a good idea, there is a risk that the implemented rules may push for traditional equity or bond issuance standards, which would not be practical for most crypto projects that are more similar early-stage tech companies. The standard should be more akin to what is applied to venture capital investments.
NFT clarification: While truly unique NFTs are largely outside the scope of MiCA, there is a possibility that assets issued in a large series or collection could be considered fungible and subject to MiCA. ESMA is expected to provide additional guidance on this.
MiCA will enter into force 20 days after it is published in the EU's official journal, likely in June, and will apply directly across the EU without any need for national implementation laws. It’s expected to become applicable for issuers of ARTs and EMTs 12 months after it is published and for issuers of utility tokens and CASPs 18 months after this point.
Overall, the regulatory clarity that MiCA provides is a positive development for the European crypto market that will help attract institutional investors and larger traditional businesses that have been reluctant to participate in the crypto ecosystem because of the regulatory uncertainty. Our team in Europe will remain actively engaged in monitoring the implementation of MiCA, and we remain hopeful its implementation guidelines will be practical and appropriate for the unique characteristics of the crypto market. Hashdex was founded to give global investors simple and regulated access to the crypto economy, and we believe MiCA will help us provide this access to more Europeans excited about the promises of this emerging asset class.
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