Cryptocurrency after the European Union’s MiCA regulation

The Markets in Cryptocurrency Regulation (MiCA) is a major milestone in the European Union’s journey to regulate the rapidly evolving cryptocurrency market. Its timing and provisions are of great importance to crypto businesses and investors alike. As we approach key dates, from the application of stablecoin regulations on June 30, 2024, to the full application of MiCA on December 30, 2024, the cryptocurrency landscape is undergoing a transformation.

In the next two years

The staggered timeframe and transition periods set out in MiCA, lasting until 30 June 2026, mean a period of fragmented implementation across the EU and European Economic Area (EEA). Jurisdictions such as Ireland (12 VASPs), Spain (96 VASPs) and Germany (12 VASPs) will grant a 12-month transition period. Other jurisdictions will offer longer periods, such as France (107 VASPs) of 18 months, while Lithuania (588 VASPs) is likely to grant only five months. This transition phase will lead to market consolidation, as not all existing service providers will provide MiCA licenses. Many will want to take advantage of this transition period before winding down their operations.

The race is intensifying among EU/EEA jurisdictions to become the primary crypto hub, with jurisdictions such as France, Malta and Ireland vying for the top spot. However, regulatory readiness and compliance for crypto businesses pose significant challenges. Regulators face a period of adjustment to upskill their staff to process MiCA applications, particularly in jurisdictions with high volumes of applications. The complexity of different business models, involving many products unfamiliar to regulators, increases this challenge. The general lack of expertise needed to license and supervise this sector requires significant training efforts.

Challenges for Crypto Companies

MiCA, combined with a wide range of related Level 2 measures (many of which still need to be finalised) and other existing EU instruments such as anti-money laundering legislation, the Digital Operational Resilience Act (DORA) and the Electronic Money Directives Act (EMD), create a complex regulatory framework. Understanding which rules apply to each type of entity and what documentation needs to be implemented will be a challenge for some.

The withdrawal of cryptocurrencies, in particular stablecoins, from EU exchanges due to the failure of their issuers to obtain licenses in time will create significant obstacles and reduce the availability of certain assets to consumers.

Adapting to MiCA will be a burden for many entities and will require significant investments in technological infrastructure. The Travel Rule, a requirement that information must be shared between VASPs for every crypto transaction, goes into effect at the same time as MiCA. The Travel Rule requires CASPs to transmit a significant amount of information about the sender. This includes their address, ID number and customer ID number. In rare cases, it may even require disclosure of the sender’s date and place of birth. This adds another layer of complexity, further emphasizing the need for EU harmonization and Travel Rule-compliant solutions that are interoperable and enable secure data sharing while maintaining user privacy.

Key cryptocurrency market results

Despite the challenges, MiCA inspires confidence in EU entities by increasing regulatory oversight, promoting investor protection and attracting mainstream institutional participation. Strengthened consumer protection measures mitigate risks such as fraud and hacking, strengthening trust among retail customers.

MiCA reporting requirements will provide regulators across the EU with more data, enabling them to effectively monitor market activity. The ability to freely passport operations across the EU will facilitate cross-border operations and reduce regulatory fragmentation, while increasing market reach.

The prescriptive nature and all-encompassing nature of MiCA set a precedent for a global regulatory framework. Other jurisdictions are already seeing this and may replicate some of MiCA’s provisions and approach, contributing to global regulatory harmonization. However, concerns remain about whether it will stifle growth and innovation, and whether businesses will want to migrate to more liberal and less restrictive jurisdictions.

Steps after MiCA

MiCA’s regulatory gaps in emerging areas such as True Defifi (provision of financial services or issuance of financial assets without identifiable intermediaries and without a single point of failure), lending and NFT transactions require ongoing policy discussions and further regulatory measures. Reports on these aspects will inform future regulatory changes, potentially leading to a second iteration of MiCA in at least the next four to five years or additional measures.

MiCA heralds a new era of cryptocurrency regulation that aims to balance innovation with investor protection and market integrity. While challenges remain, MiCA lays the foundation for a more transparent, secure and inclusive cryptocurrency framework in the EU and beyond. As the cryptocurrency landscape evolves, regulatory regimes must adapt to emerging trends and technologies, ensuring sustainable growth and strengthening investor confidence.