European Council passes landmark Markets in Crypto Asset Regulation (MiCA)
On 7th October the European Council approved the Markets in Crypto Asset Regulation (MiCA), setting a precedent for the broader crypto landscape in Europe. The bill will be put before the European Parliament for a further vote. If approved, the laws under MiCA are expected to take effect at the end of 2023.
The development marks a significant step taken by the EU to ‘put order in the wild west of crypto assets and set clear rules for a harmonised market’. The regulation brings crypto assets squarely under the supervision of the European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA), which are given powers to ban or restrict crypto platforms if they are seen to threaten investor protection, market integrity or financial stability.
Stablecoins in the cross hairs
There is a heavy focus on stablecoins in the legislation, recalling the collapse of terraUSD earlier this year which resulted in hundreds of billions of dollars being wiped from the crypto market. MiCA mandates that stablecoin issuers maintain ample reserves, with a 1/1 ratio and partly in the form of deposits, to meet redemption requests in the event of mass withdrawals. In May, terraUSD (UST) de-pegged from the US dollar and over the course of four days collapsed, leading to the halt of the Terra blockchain ecosystem.
Controversially MiCA also places a cap on non-Euro stablecoins of 200 million euros per day when marketed in the eurozone. Detractors argue that the curb will limit the EU’s competition and innovation potential. The three largest stablecoins – Tether, USD Coin and Binance USD – account for 75% of total trade volume and comfortably exceed the proposed cap. For example, USDT and USDC have daily stablecoin trading volumes of 48 billion euros and 5.5 billion euros, respectively.
Are NFTs in or out of scope?
A debate over whether cryptocurrency is a security or a commodity is also addressed in the bill. Under MiCA, cryptocurrencies are divided into four categories: crypto-assets, utility tokens, asset-referenced tokens and electronic money tokens (e-money) – each with their own set of regulations. MiCA does not apply to NFTs that are unique and not fungible with other crypto – for example digital art, collectibles, product guarantees and real-estate. On the other hand, NFTs which serve as financial instruments (such as tokenized bonds and tokenized commodities) are in scope and governed in the same way as conventional securities, under existing securities law.
MiCA mandates that certain market participants will be required to make disclosures regarding their environmental and climate footprint. ESMA is tasked to draft technical standards on the content, methodologies and presentation of information pertaining to environmental impact. Initially, it was suggested that the energy intensive proof-of-work consensus mechanism, used by Bitcoin and others, would be outlawed. However, the final text does not go so far.
MiCA is by far the most ambitious and extensive set of regulations to govern crypto assets. We expect it to accelerate the institutional adoption of crypto by giving greater comfort and clarity to investors and market operators. The UK and the US have yet to approve similar rules, although regulators in both jurisdictions have expressed the need for stronger safeguards.
It is to early to say for certain whether the regulation will hamper or accelerate innovation and adoption in the crypto space. The prospect of a MiCA II is already being raised …