Cryptocurrency after the European Union’s MiCA regulation

Editor’s Note: The original article was first published on crypto.news on 30 June 2024.

The Markets in Crypto-Assets Regulation (MiCA) marks a significant milestone in the European Union’s journey toward regulating the rapidly evolving crypto market. Its timeline and provisions hold immense importance for both crypto businesses and investors. As we approach crucial dates, starting with the application of stablecoin provisions from June 30, 2024, and the complete application of MiCA on December 30, 2024, the crypto landscape is undergoing a transformative phase.

Over the next two years

MiCA’s staggered timelines and transitional periods, extending up to June 30, 2026, imply a period of fragmented implementation across the EU. Jurisdictions such as Ireland, Spain, and Germany will grant a 12-month transitional period. In contrast, other jurisdictions will offer more extended periods, such as France with 18 months, while Lithuania will likely only grant five months¹. This transitional phase will prompt market consolidation as not all existing service providers will secure MiCA licenses. Many will look to capitalize on this interim period before winding down operations.

The race among EU/EEA jurisdictions to become the primary hub for crypto activities intensifies, with jurisdictions like France, Malta, and Ireland competing to take the top spot. However, regulator readiness and compliance for crypto-asset businesses pose significant challenges. Regulators are facing an adjustment period to upskill their staff to process MiCA applications, particularly in jurisdictions with high applicant volumes. The complexity of various business models, encompassing numerous products unfamiliar to regulators, exacerbates this challenge. The general lack of expertise to authorise and supervise this sector requires substantial training efforts.

Challenges for crypto businesses

MiCA, coupled with the vast array of related Level 2 measures (many of which still need to be finalised) and other applicable EU instruments such as the anti-money laundering laws, the Digital Operational Resilience Act (DORA), and the Electronic Money Directive (EMD), create a complex regulatory framework. Understanding what provisions apply to each entity type and what documentation needs to be implemented will be challenging for some.

The delisting of crypto-assets, particularly stablecoins, from EU exchanges due to their issuers’ failure to obtain their licenses on time will pose considerable hurdles and limit the availability of certain assets for consumers.

Adapting to MiCA will strain many entities and require substantial investments in technological infrastructure. The EU's Travel Rule, Transfer of Funds Regulation (ToFR), a requirement in which information must be shared between VASPs with each crypto transaction, also comes into effect at the same time as MiCA. The Travel Rule, which is mandates that CASPs transfer a substantial amount of information about the originator. This includes their address, personal identification number, and customer identification number. In rare cases, it may even require the disclosure of the originator’s date and place of birth. This adds another layer of complexity, further highlighting the need for harmonisation within the EU and solutions to comply with the Travel Rule that are interoperable and enable secure data sharing while preserving user privacy.

Key crypto market outcomes

Despite the challenges, MiCA instils confidence in EU entities due to heightened regulatory oversight, the promotion of investor protection and attracting mainstream institutional participation. Enhanced consumer protection measures mitigate risks such as fraud and hacking, fostering trust among retail clients.

MiCA’s reporting requirements will result in regulators across the EU possessing more data, empowering them to monitor market activities effectively. The ability to freely passport activities across the EU will facilitate cross-border operations and reduce regulatory fragmentation while expanding market reach.

MiCA’s prescriptive nature and all-encompassing regime set a precedent for global regulatory frameworks. Other jurisdictions are already observing and may replicate some of MiCA’s provisions and its approach, contributing to regulatory harmonisation on a worldwide scale. However, concerns remain as to whether it will stifle growth and innovation and whether businesses will look to relocate to more permissive and less restrictive jurisdictions.

Steps after MiCA

MiCA’s gaps in regulating emerging areas like true DeFi (the provision of financial services or issuance of financial assets without identifiable intermediaries and with no single point of failure), lending, and NFTs necessitate ongoing policy discussions and further regulatory measures. Reports on these aspects will inform future regulatory developments, potentially leading to a second iteration of MiCA in at least the next four to five years or supplementary measures.

MiCA signals a new era of regulation in the crypto market, aiming to balance innovation with investor protection and market integrity. While challenges persist, MiCA lays the groundwork for a more transparent, secure, and inclusive crypto framework in the EU and beyond. As the crypto landscape continues to evolve, regulatory regimes must adapt to emerging trends and technologies, ensuring sustainable growth and fostering investor confidence.

^{1. Data verified by VASPnet on 20 May 2024}