Taming the (Crypto) Bull: The EU’s Markets in Crypto-Assets Regulation

By Daniel Mooney

The global cryptocurrency market is estimated to be worth around $3 trillion in value with massive growth across a number of crypto-asset areas. This includes Non-Fungible Tokens (NFTs) which have been selling for record prices. While the market has been booming, regulation and consumer protection has been lackluster, aided in no  small part by cryptocurrencies typically being designed to avoid regulation from the outset.

The Markets in Crypto-Assets Regulation (MICA) proposal was published by the European Commission in September 2020 with the stated aim of bringing the crypto-assets market into the regulatory fold as part of the broader Digital Finance Package. The Regulation was also spurred on by the Commission’s desire to avoid regulatory divergence between Member States, which would damage the digital single market. Another reason for the desire to bring regulatory control to the crypto-assets market was the concern arising from Facebook’s (short lived) Diem project and its potential to destabilize standard currency markets.

In brief, MICA aims to divide crypto-assets into a number of broad categories, with all providers being required to apply to their Market Supervisory Authorities (MSA) for a MICA license allowing operation throughout the EU.  For instance, Asset-Referenced Tokens, which are crypto-assets that are tied to an item of value, will be subject to a comprehensive regime that requires substantial engagement with MSAs and other obligations regarding cash reserves. Similarly, E-Money Tokens, such as Tether, which are paired one-to-one with a fiat currency will also face significant oversight and regulation by the MSAs, particularly in relation to minimum capital reserves which ensure financial stability. The third main category of crypto-assets are utility tokens, which are the subject to the lightest rules. Issuers or providers of these tokens must draft a White Paper and notify the relevant MSA prior to launching the product although they are otherwise allowed to operate without any invasive regulatory oversight.

One of the key requirements across all types of providers is the  requirement for the publication of White Papers. These White Papers essentially act as market prospectuses. They require those planning to launch a crypto-asset to set out the risks and technical details of the cryptocurrency/asset project as well as providing verification of any statements made to potential investors. Although White Papers are already common in the crypto-asset space, the Regulation would require a much more burdensome standard.

Aside from the advantages of oversight and regulation to consumers, providers of crypto-assets will also benefit by being able to gain a market ‘passport’ which allows them to be regulated in one Member State and then access the entire EU market.

Criticism has been levelled at MICA due to its complexity in respect of crypto-asset categorization. Lannoo argues that this complexity will undermine protections for consumers and make operating in the market more difficult. There are also some concerns regarding overregulation and how that may strangle innovation in the emerging market. In spite of these concerns however, regulation is arguably necessary at this point to avoid divergent regulatory regimes from developing and to safeguard the currently unprotected users of these products.

While the EU MICA looks to radically reshape the crypto-assets market, it is not the only major global market that has taken steps to curb the growth of the crypto. For instance, China first banned ‘coin substitution’ (i.e., the trading of real, fiat currency for crypto-currency) in 2019, and it has since moved to ban crypto trading altogether. The EU’s proposal of course aims to bring the market under control and within the purview of regulators rather than completely prohibiting crypto-markets altogether. It is hoped that by adopting stringent and comprehensive regulation at this key juncture, the EU can become the global standard setter for the crypto-assets market.Overall, regulation of this space is to be welcomed as it helps to safeguard the integrity of the digital single market and to ensure stability and certainty to financial operators. Furthermore, the proposals will protect consumers by mandating higher standards for those seeking to operate within the crypto-assets domain and bringing to an end the legal uncertainty that currently surrounds such assets. While some rightfully question the utility of crypto-assets in general, for those in favor of their place in the new digital environment, robust regulatory intervention will ensure their continued survival. The regulation is expected to be passed in 2022 and be fully transposed by 2024.

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