Markets
Cryptocurrency after EU MiCA regulation
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O Regulation of cryptoactive markets (MiCA) marks a significant milestone in the European Union’s journey to regulate the rapidly evolving crypto market. Its timeline and provisions have immense importance for both crypto companies and investors. As we approach crucial dates, starting with the enforcement of stablecoin provisions from June 30, 2024, and the full enforcement of MiCA on December 30, 2024, the crypto landscape is undergoing a transformative phase.
In the next two years
MiCA’s staggered deadlines and transition periods, which extend until 30 June 2026, imply a period of fragmented implementation across the EU and the European Economic Area (EEA). Jurisdictions such as Ireland (12 VASPs), Spain (96 VASPs) and Germany (12 VASPs) will grant a 12-month transition period. In contrast, other jurisdictions will offer longer periods, such as France (107 VASPs) with 18 months, while Lithuania (588 VASPs) will likely only grant five months. This transition phase will lead to market consolidation, as not all existing service providers will secure MiCA licenses. Many will look to capitalize on this interim period before ceasing operations.
The race between EU/EEA jurisdictions to become the main hub of crypto activity intensifies, with jurisdictions such as France, Malta and Ireland competing for the top spot. However, regulatory readiness and compliance for cryptoasset companies pose significant challenges. Regulators are facing a period of adjustment in training their staff to process MiCA requests, especially in jurisdictions with high volumes of applicants. The complexity of the various business models, which cover numerous products unknown to regulators, exacerbates this challenge. The general lack of expertise to authorize and supervise this sector requires substantial training efforts.
Challenges for crypto companies
MiCA, together with the wide range of related Tier 2 measures (many of which still need to be finalized) and other applicable EU instruments such as anti-money laundering laws, the Digital Operational Resilience Act (DORA) and the Electronic Money Directive (IN D), create a complex regulatory structure. Understanding which provisions apply to each type of entity and what documentation needs to be implemented will be challenging for some.
The withdrawal of cryptoassets, especially stable coins, from EU exchanges due to their issuers not obtaining their licenses in a timely manner will pose considerable obstacles and limit the availability of certain assets to consumers.
Adapting to MiCA will burden many entities and require substantial investments in technological infrastructure. Travel rulea requirement that information must be shared between VASPs for each crypto transaction, also comes into effect at the same time as MiCA. The Travel Rule requires CASPs to transfer a substantial amount of information about the originator. This includes 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 harmonization within the EU and solutions to comply with the Travel Rule that are interoperable and allow for secure data sharing while preserving user privacy.
Key Crypto Market Findings
Despite the challenges, MiCA inspires confidence in EU entities by strengthening regulatory oversight, promoting investor protection and attracting mainstream institutional participation. Enhanced consumer protection measures mitigate risks such as fraud and hacking, fostering trust among retail customers.
MiCA’s reporting requirements will result in regulators across the EU having more data, enabling them to effectively monitor market activities. The ability to freely authorize activities across the EU will facilitate cross-border operations and reduce regulatory fragmentation while expanding market reach.
The prescriptive nature and comprehensive regime of MiCA have set a precedent for global regulatory frameworks. Other jurisdictions are already observing and could replicate some of MiCA’s provisions and approach, contributing to regulatory harmonization on a global scale. However, concerns remain about whether this will stifle growth and innovation and whether companies will seek to move to more permissive and less restrictive jurisdictions.
Steps after MiCA
MiCA’s gaps in regulating emerging areas such as true defi (the provision of financial services or issuance of financial assets without identifiable intermediaries and without a single point of failure), lending, and NFTs necessitate continued policy discussions and additional 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 foundation for a more transparent, secure and inclusive cryptographic 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 promoting investor confidence.
Ernesto Lima
Ernesto Lima is one of the founding partners of XReg Consulting and a qualified lawyer with over 17 years experience working in financial services regulation. As XReg’s legal and regulatory policy lead, he is highly experienced in the design, development and implementation of cryptocurrency legislative frameworks that meet global and local policy objectives. At XReg, Ernest leverages in-house European Cryptocurrency Markets Regulation (MiCA) expertise to advise European clients or those seeking to enter the European market. He also leads engagement with European public sector authorities and National Competent Authorities in their transition to MiCA compliance. Ernest has also spoken at industry conferences and trained international regulatory authorities on Europe’s MiCA regulation and how it will shape the future of the international cryptocurrency regulatory landscape. He also sits on the Financial Markets Law Committee to address issues arising from the use of cryptoassets and DLT.