In May 2023 the European Union published its new regulatory framework that would overlook cryptocurrencies, cryptocurrency issuers and crypto-asset providers known as the Markets in Crypto-Assets (MiCA) regulation.
On 12 July 2023, the EU’s financial markets regulator and supervisor, the European Securities and Markets Authority (ESMA), published the first-ever consultation package under the MiCA regulation.
“This first consultation package is an important milestone for ESMA in the implementation of the MiCA framework. It translates our ambition to set high regulatory standards in the EU for crypto-asset-related activities into concrete requirements,” ESMA’s Chair, Verena Ross said in a press release.
Meanwhile ESMA said they were awaiting comments from stakeholders regarding their first-ever consultation package, experts believe that in the long run, MiCA could be destined to fail.
What Is MiCA?
MiCA is essentially the European Union’s green pass into somehow controlling cryptocurrencies, an industry renowned to be unregulated and ‘independent’.
It is also the first-ever full regulatory framework for cryptocurrencies worldwide which aims to protect investors while also ensuring financial stability and supporting innovation.
“I am very pleased that today we are delivering on our promise to start regulating the crypto-assets sector. Recent events have confirmed the urgent need for imposing rules which will better protect Europeans who have invested in these assets, and prevent the misuse of crypto industry for the purposes of money laundering and financing of terrorism,” Sweden’s minister of finance, Elisabeth Svantesson, said in a press release that was published by the European Union outlining the MiCA regulation.
While the regulation is due to take effect in 2024, the first-ever consultation package based on MiCA has already been published by ESMA.
“Some of the recent collapses in the crypto world have shown a misuse of clients’ funds and crypto-assets. This seems to have been permitted by a lack of governance and internal controls (see above) but this also highlights the relevance of the requirements on safekeeping of clients’ crypto-assets and funds for ensuring investor protection. Thus, the draft RTS aims at providing NCAs with appropriate information about the applicant’s procedure for the segregation of clients’ crypto-assets and funds,” the report underlined.
MiCA Could See Three Potential Challenges
In the early days since MiCA’s introduction, statistics showed that EU crypto firms had seen a surge in funding. However, the CEO of Sellix, an EU website selling digital services that also accepts cryptocurrency transactions, Daniele Servadei, told Business2Community that in the long run, MiCA could face three potential challenges.
These include the struggle to keep up with the rapid advancement of the crypto and blockchain space and the struggle to find a balance between regulation and fostering innovation.
In addition, Servadei stressed that MiCA could also cause inconsistencies in the implementation and enforcement of the regulation in all 27 EU states amid differences in the economic and legal systems.
“I particularly see the legislation contributing to increased trust and stability in the EU’s crypto market. Meanwhile, the high regulatory compliance costs could create hurdles for new and small businesses,” he added.
MiCA Could Discourage Further Blockchain Development in the EU
Servadei added that MiCA’s “stringent compliance requirements could be burdensome for businesses operating in the EU”.
In addition to that, MiCA could also discourage the development of new blockchain businesses within the European Union, especially if the legislation will negatively affect older, more well-established crypto businesses.
Of course, working closely with lawmakers can help crypto businesses side pass any challenges that they may face, Servadei added.
“Providing adequate support and phased compliance for smaller businesses and startups will be a big help. Ensuring these regulations accommodate a variety of business models and technological advancements is also an important mediation step.”
Does MiCA Have Any Alternatives?
While it seems that MiCA will go ahead as planned, Servadei added that there are other alternatives to regulating the cryptocurrency industry in a much lighter way.
Implementing regulatory “sandboxes”, for example, would allow businesses to test innovations in a controlled environment while using regulatory supervision.
“The second is principle-based regulation, whereby lawmakers define high-level principles that businesses should follow,” he said.
Finally, a tiered approach could also be implemented where varying levels of regulation are established based on the size, nature and risk profile of the individual crypto business, as proving a general regulatory frame for every business might be more challenging.
“European lawmakers should also look at the development of crypto regulations in other Countries. The UK’s Financial Conduct Authority is currently developing crypto regulations, and countries like China and the United Arab Emirates are also developing positive regulatory frameworks for their crypto industries.”
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