EU reaches agreement on crypto regulation framework

EU reaches agreement on crypto regulation framework

EU reaches agreement on crypto regulation framework

Two years ago, policymakers in the European Union sat down to talk about a new proposed crypto regulation framework called Markets in Crypto-Assets (MiCA).

Last week, the European Parliament reached an agreement on the new regulations, which will see the measures implemented over the next few years.

The EU’s goal is to foster the innovation and development of crypto-assets while maintaining their stability and ensuring consumers are protected legally.

We have seen investors lose billions of dollars in recent crypto crashes and with no regulations or protection in place, no helping hand is being extended to EU citizens. MiCA aims to change that.


MiCA’s objectives


The MiCA proposal has four objectives:

1) Create a proper legal framework for crypto-assets to be regulated

2) Support and promote the development of crypto-assets and the use of distributed ledger technology

3) Establish suitable levels of consumer and investor protection

4) Ensure financial stability, specifically relating to stablecoins


MiCA in practice

While MiCA consists of hundreds of pages of regulations, we have outlined the most important bits:


Consumer protection

Anyone providing crypto-related services has to to follow strict requirements to protect consumer wallets, and they will be liable in case they lose their consumers’ crypto-assets. Most likely, this would have protected the users of Celsius and CoinFLEX.

The MiCA also prohibits any form of market manipulation involved in crypto markets.

Environmental impact

Crypto projects will be required to determine and declare their environmental footprint since the European Commission is building a report on the climate-related impact of crypto-assets, which will ultimately introduce sustainability standards.

Compliance

The EU already includes crypto-assets in their anti-money laundering legislation (AML), which means the MiCA will not repeat the contents of the AML. However, they do require the European Banking Authority to maintain a list of crypto-asset service providers that do not comply with the new regulations.

Stablecoins: E-money tokens

The EU states that e-money tokens (EMTs), e.g. USDC or the newly-issued EUROC, “are intended primarily as a means of payment [that] aim at stabilizing their value by referencing only one fiat currency.”

MiCA will require all EMT issuers to have a sufficient liquid reserve, with a minimum of a 1/1 ratio of the reserve to stablecoins. The issuers must offer a claim at any time to their consumers to redeem the real underlying currency.

The European Banking Authority will supervise these EMTs and requires the issuers to have a legal presence in the EU.

Stablecoins: Asset-referenced tokens

The EU states that asset-reference tokens (ARTs) “aim at maintaining a stable value by referencing several currencies that are legal tender, one or several commodities, one or several crypto-assets, or a basket of such assets.”

Issuers of ARTs are not required to offer a claim to their consumers. However, they must provide continuous clear information on the token’s stabilization mechanism, its reserve assets, the number of tokens in circulation, and any events that could have an impact on the token’s value.

The issuers are also under certain capital and reserve requirements, and they must have a registered office in the European Union.

Stablecoins: Algorithmic

Algorithmic stablecoins are not considered asset-referenced tokens by the EU, and as such, they are left out of the proposed framework. Hence, most likely MiCA would not have protected users who lost funds in the Terra Luna crash.

However, the proposal was created far before Luna’s crash, which could mean the EU will seek also to regulate algorithmic stablecoins in the future.

White paper

Issuers of crypto-assets must publish a white paper with mandatory disclosure requirements, which fully lays out the project, its plans, and its mechanisms.

Exceptions include companies that aim to release less than €1 million in crypto-assets over 12 months or stablecoins whose supply is less than €5 million.

NFTs

NFTs are not included in the proposed framework. However, the European Commission will determine if NFTs also require regulation within 18 months.


Markets in Crypto-Assets

Dante Disparte, the chief strategy officer of USDC and EUROC issuer Circle, said that MiCA “will be to crypto what GDPR was to privacy.”

The General Data Protection Regulation (GDPR) is the EU regulation responsible for the annoying pop-ups on websites that ask users to accept cookies, and yet, it was an inspiration for many other countries to introduce similar privacy laws.

Could the MiCA have the same effect on the crypto industry? Only time can tell as the regulations roll out in practice.

This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.

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