Markets
Europe’s MiCA has finally arrived. How will the US respond?
On Sunday, the first wave of the European Union’s landmark sweeping law governing digital assets will come into force. With the framework for regulating crypto markets, Europe has managed to do what other jurisdictions, including the U.S., have so far failed to do: provide legal and regulatory clarity not for one part of the digital asset market, but for the entirety of it.
Catalyzed by the specter of Big Tech, such as Meta’s Diem (formerly Libra) initiative, entering financial markets, or by fears of runaway cryptocurrencies, the past five years have been marked by concerted policy developments in Europe. MiCA will have a profound effect on permanently connecting digital assets and the real economy, and doing so in a distinctively European way.
Dante Disparte is Circle’s chief strategy officer and head of global policy.
The opinions expressed in this column are those of the author and do not necessarily reflect those of CoinDesk, Inc. or its owners and affiliates.
In crypto’s first decade, much of the industry was characterized by a recurring and surprising boom-and-bust cycle that, in many ways, made this a uniquely American market. As a result, the US dollar is not just the price benchmark for digital assets (courtesy of the steady rise of stablecoins, which now exceed more than $150 billion)., but also the reserve currency of internet finance, much as it plays that role in the real world. MiCA aims to address this by giving euro-denominated stablecoins, which will be classified as electronic money tokens under new EU rules, a chance to succeed and a 441 million-strong consumer market.
While some aspects of MiCA are protectionist in nature, anchored in protecting European consumers and investors from the fraud and risks that have plagued rapidly evolving crypto markets, there is also a degree of economic and technological sovereignty at stake. This is most evident in the way offshore stablecoins – diplomatically referred to as global stablecoins – are inadmissible under MiCA. Stablecoins pegged to other currencies must primarily comply with the licensing requirements for electronic money in Europe, which would entail compliance with prudential, financial crime compliance and other rules. If the stablecoin issuer offers other crypto asset services, it must obtain a second license – either as a digital asset service provider (DASP), virtual asset service provider (VASP) or crypto asset service provider (CASP), depending on the jurisdiction. This requirement is a basic level of compliance for the safekeeping of digital assets. Beyond these licensing requirements, gone are the days of amorphous crypto companies with no substantial presence in the EU.
Indeed, MiCA is as much about job development and economic competitiveness as it is about consumer and market protection. Licensed entities must have responsible “mind and management” in an EU jurisdiction through which they can then pass their operations across the federation thanks to pan-European regulatory harmonization – although there is still some distance to go before national-level regulators ensure that MiCA enters into force smoothly across the common market.
For the crypto industry and its existential link to the banking sector, MiCA marks a profound change, for which only the most serious players are prepared. For example, in the resurgent stablecoin category, where the dollar is the reference currency, MiCA marks a proverbial fiscal cliff where unregulated or non-compliant tokens will eventually be delisted or their access will be heavily restricted by crypto exchanges. The reason is simple. Instead of treating stablecoins as a fringe financial product or just a poker chip in a crypto casino, MiCA brings stablecoins into line with the old e-money rules. Therefore, all stablecoins offered by EU crypto exchanges must comply with the rules for e-money tokens. This gives the token holder a right to redeem the underlying currency directly from the issuer, a way to reinforce collective responsibility and consumer protection across the interconnected value chain of digital assets – from wallet, to exchange, and ultimately to the issuer. Contrast this model with the amorphous standards or lack of prudential protections that protect against a run on the Terra Luna stablecoin in name alone. Had Terra Luna complied with the equivalent of electronic money in the US, which are state money transmission laws, consumers might have been better protected from collapse.
Under the prevailing EU model, all regulated stablecoins will now have a common regulatory floor, which will not only encourage competition but will ultimately lead to broader fungibility and interoperability in the EU market. Like all new comprehensive rules or regulations, MiCA is imperfect and in some places overly prescriptive, so much so that EU lawmakers are already contemplating MiCA 2.0, which would potentially fill certain gaps in the regime, such as non-fungible tokens (NFTs), decentralized finance, and other areas. While MiCA has now given clear rules to European crypto market participants, on the American side of the Atlantic, imperfect rules or a lack of federal regulations have allowed an industry to flourish. Should transatlantic technological disruption increase – or should the US and critical EU partners aspire to shared digital commons?
If U.S. policymakers adopt a competitive stance toward the EU on digital assets, a true “NAFTA for digital assets” could be envisaged across North America. A lasting alternative, however, would be to form a transcontinental Western alliance for digital assets that would enshrine shared democratic values in these emerging markets and how exponential technologies shape the future.
Now that the world has MiCA, it is time for the US to act and reaffirm its place as a global leader in financial services regulation and innovation.