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A quick guide to EU MiCA regulations

Posted on by darion

in late May 2023 is being implemented in stages. Different sections will be enforced until December 2024, giving cryptocurrency companies time to adapt.

The European Union (EU) is well known for its commitment to establishing uniform rules and standards to facilitate the smooth functioning of the internal market. In its latest move, the EU has set its sights on the world of cryptocurrencies, introducing the Markets in Crypto-Assets Regulation (MiCA).

The aim of these regulations is to usher in a new era of cryptocurrencies by providing comprehensive oversight over various aspects of the industry, including stablecoins, NFT markets, DeFi protocols, etc.

In this article, we will take a closer look at the MiCA regulations, identify the key areas of the cryptocurrency industry that they will affect, and analyze the potential impact these regulations could have on the cryptocurrency market once implemented.

What is MiCA?

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MiCA is an abbreviation for the European Union Markets in Crypto-Assets Regulation, the regulatory framework established by the EU to govern crypto-assets.

It is worth noting that the key term here is “regulation”, meaning that MiCA will replace any existing EU cryptocurrency regulations.

Why was MiCA created?

Before MiCA, there was no consistent regulation of crypto-assets across EU member states, which created uncertainty for businesses and consumers. Some countries had stricter regulations, while others had almost none. MiCA aims to establish a single set of regulations across the EU, making it easier for businesses to do business and for consumers to understand the risks associated with crypto-assets.

Other reasons include:

  • Combating money laundering – While many EU countries have anti-money laundering laws in place, they are often poorly enforced or lack provisions to effectively regulate cryptocurrencies.
  • EBA Report – The European Banking Authority’s 2019 report, “Advice Report to the European Commission,” played an important role in pushing the MiCA bill forward. The report highlighted shortcomings in EU cryptocurrency regulation, acting as a catalyst for regulatory action.
  • Euro protection – The EU has raised concerns about the potential threat to the euro from US-backed stablecoins and their growing adoption. The EU aims to protect the stability of the euro by regulating various aspects of the cryptocurrency market.

What makes MiCA stand out?

MiCA stands out from previous cryptocurrency regulations with a clear framework that classifies cryptoassets into three distinct classes:

  • Utility Tokens – This category includes crypto projects that offer unique value propositions. This includes governance tokens that grant users voting or participation rights in specific crypto ecosystems.
  • Asset Linked Tokens (ART) – ART is a cryptocurrency, such as a decentralized stablecoin like DAI, backed by an underlying asset, such as a commodity, property, or another cryptocurrency. The value of ART is pegged to the value of the underlying asset, meaning it rises or falls in tandem with that asset.
  • Electronic Money Tokens – E-money tokens include centralized stablecoins such as USDT and USDC. These regulations do not apply to central bank digital currencies (CBDCs) or stablecoins issued by international entities such as the International Monetary Fund (IMF) or the European Central Bank.

With this framework, the EU aims to regulate both decentralized and centralized stablecoins and NFTs and oversee the creation of new cryptocurrency projects.

What does this mean for cryptocurrencies and how will it affect you?

Please note that the EU and Europe are not synonymous. These rules will not directly apply to you if you live in a non-EU region, such as the UK.

However, the impact of MiCA on cryptocurrencies depends on whether you are a user or a company operating in the cryptocurrency industry:

Impact on stablecoins

The MiCA bill will significantly impact the trading volume, issuance, and usability of stablecoins. The bill limits daily stablecoin payment transactions to €200 million. This limit may seem restrictive, especially considering that stablecoins such as USDC and USDT currently have daily trading volumes of €1-4 billion globally, with over €500 million traded in the EU alone.

It should be noted, however, that this limit explicitly applies to payment transactions and does not affect stablecoins in other contexts, such as trading and DeFi. For example, staking and lending platforms are exempt from this limit.

Exemption for major cryptocurrencies

The MiCA Act does not apply to well-established cryptocurrencies such as Bitcoin and Ethereum. Instead, it focuses primarily on tokens, stablecoins, DeFi products, and NFTs.

This approach is sensible, as the main goal of the bill is to protect the euro from cryptocurrencies such as stablecoins, which have gained popularity in Europe due to factors such as high inflation, volatility of traditional fiat currencies and reduced trust in them.

Requirements for launching utility tokens

Projects issuing utility tokens in the EU must comply with certain launch requirements. They are required to submit a whitepaper to the relevant EU authorities and launch the project within a year of the publication of the whitepaper. This provision aims to prevent the practice of indefinitely delaying the launch of projects while constantly selling tokens to unwitting investors.

Regulation for Asset Reference Tokens (ART)

The MiCA bill mandates that ART documents contain three key caveats: (1) ART may not always be transferable, (2) ART may go to zero, and (3) ART may not always be liquid.

In addition, small-cap ART companies are not required to register with regulators, but if their market capitalization increases significantly, they will be required to comply with regulatory guidelines, including potential trading volume limits and certain reserve requirements.

NFT Regulation

MiCA introduces detailed regulations for fractional NFTs. While some EU governments initially sought to exempt NFTs from regulation altogether, lawmakers in the European Parliament argued that many NFTs function as financial products and are susceptible to fraudulent activity. As such, fractional NFTs will be subject to registration and white paper filing requirements.

DeFi and Consumer Protection

The MiCA law takes a relatively friendly stance towards DeFi, but gives governments leeway in interpreting the definition of decentralization. On the other hand, the law imposes strict consumer protection measures on companies like exchanges and crypto asset providers, holding them liable for consumer losses caused by cyberattacks, theft, or failures in their scope of operation.

Final thoughts

The MiCA bill is an EU move to protect its interests, not a direct attack on the cryptocurrency industry. Opinions differ, however, with some seeing it as part of a broader strategy to control the cryptocurrency and decentralized finance sectors.

As MiCA regulations evolve and come into effect, the cryptocurrency industry will undoubtedly adapt and respond to these changes, thereby shaping the future landscape of digital assets in the EU.