Yesterday the European Union reached a provisional agreement for the Markets in Crypto-assets (MiCA) regulation. But the process still has a couple of smaller steps.
“Today, we put order in the Wild West of crypto assets and set clear rules for a harmonised market that will provide legal certainty for crypto asset issuers, guarantee equal rights for service providers and ensure high standards for consumers and investors,” said Stefan Berger, the conservative Member of Parliament responsible for the trilogue negotiations.
He added, “This Regulation will help to move crypto markets away from the dodgy backwaters of the internet by applying minimum standards that are similar to other types of financial services.”
Europe has a rather laborious regulatory process. Even though Parliament approved a provisional bill in March, it still had to enter into trilogue negotiations with the European Council and Commission. That’s what was completed yesterday. But that provisional agreement is still subject to approval by the Council and Parliament before being formally adopted.
Some of MiCA’s many issues
One of the most contentious issues was whether to ban Bitcoin because of its environmentally unfriendly use of electricity, which the Greens were pushing for. That was touch and go during the parliamentary debates, but eventually, a ban was removed and it remains absent after the trilogues.
However, there was a compromise. “MiCA will provide a mandate for ESMA to develop sustainability standards so that we can assess the environmental impact of different crypto-assets, and it mandates the co-legislators to take into account this impact in the future review,” said Ernest Urtasun Vice-President of the Greens. “We wanted a clear plan to phase out unsustainable consensus mechanisms like the proof of work. However, we see the compromise as a first step that will lead to fundamental changes to the sector in the next review.”
The European Council was keen to highlight MiCA’s position on stablecoins, mentioning the requirement of a European presence by the issuer. It also emphasized that non-European currency stablecoins will be ‘constrained’ to protect monetary sovereignty. One aspect not mentioned is that MiCA bans interest on stablecoins, whereas this is a critical business model for many of them.
Another key MiCA feature relates to investor compensation by custodians. Exchanges frequently act as custodians, and if they’re hacked, MiCA requires them to compensate their clients. Exchanges also have to keep client assets segregated from their own. This should help significantly in the event of an exchange’s insolvency, but unless the parliamentary version has been amended, the wording is a little vague.
Non fungible tokens (NFTs), unless fractionalized, are outside the scope of MiCA, which was part of the parliamentary version.
The new legislation is expected to come into force in 2024, and the EU already has its eyes on MiCA 2.