Here’s how MiCA regulations will impact the European crypto market

The following is a guest post from Mike Romanenko, CVO and co-founder of Kyrrex.

The European crypto landscape is on the verge of a significant transformation with the introduction of the Markets in Crypto-Assets (MiCA) regulation. Mike Romanenko, CVO and co-founder of Kyrrex, predicts that this will present multiple opportunities and challenges for crypto players across European countries.

Expected changes after MiCA adoption

O adoption of MiCA across European countries marks a monumental shift for the cryptocurrency industry. For market participants, this regulation introduces strict rules governing several facets of the industry, including cryptocurrency exchanges, fund custody, and customer verification processes. While these rules may initially seem quite onerous, they are designed to increase the security and transparency of cryptocurrency operations.

More importantly, a primary goal of MiCA is to protect end users by ensuring that companies follow transparent auditing practices and maintain verifiable reserves. This need for transparency has become particularly evident following several collapses of major cryptocurrency companies since 2020, notably FTX Fallwhich exposed the vulnerabilities and risks within the industry.

I believe that regulation will facilitate the entry of institutional investors into the cryptocurrency market. By establishing clear and consistent rules, MiCA can help attract significant institutional and corporate funding, increasing market liquidity and stability. The situation reflects the introduction of Bitcoin ETFs in the US, which allowed institutional investors to gain exposure to Bitcoin through regulated financial products.

The challenge of implementation

Despite the long-term benefits, I never expected the initial MiCA implementation phase to be easy. Europe currently has around 2,000 Virtual Asset Service Providers (VASPs), many of which are in no rush to comply with the upcoming regulations. Local authorities will face substantial pressure to review and approve applications promptly, leading to a potential backlog and operational delays.

Some countries, such as Malta and France, have already begun to align their regulations with MiCA, but overall readiness across Europe varies significantly. I expect this disparity to result in a period of confusion and disruption as businesses scramble to meet the new standards.

The entire process is scheduled to take three years, from June 2023 to July 2026, and includes the following steps:

• Entry into force of MiCA (June 2023).
• Deadline to opt out of adopting the acquired right or reducing its duration (June 2024).
• Entry into the MiCA application (December 2024).
• End of transition phase (July 2026).

MiCA has the potential to significantly impact the cryptocurrency market within the EU. I would like to highlight the following expected effects:

• Greater consumer protection. The goal of MiCA is to establish clear rules for crypto assets, providing better protection for investors.
• Greater market integrity. By setting governance standards, MiCA aims to promote fair competition and prevent market abuse.
• Cross-border operations simplified. With a harmonised regulatory ecosystem, companies in the EU will find it easier to operate across borders.
• Driving innovations. The pilot scheme for distributed ledger technology (DLT) market infrastructures could lead to more efficient blockchain-based financial systems.

I would say the key aspect of MiCA is the new classification for crypto assets, known as CASPs: crypto asset service providers. This includes exchanges, custodian wallet providers and trading platforms, which will be subject to authorization by national authorities. The classification aims to ensure that all entities providing crypto services comply with the same regulations.

Regulatory Challenges and Opportunities in the US and Other Countries

In contrast to Europe, the US does not have a unified regulatory framework for crypto assets, which leads to significant uncertainty. While Bitcoin is classified as a commodity, the status of other digital assets, such as Ethereum, remains ambiguous. Despite what I would like to see, this lack of clarity complicates compliance and increases the risk of regulatory action against crypto companies.

However, there are many positive developments. The introduction of Money Transmitter Licenses (MTLs) for cryptocurrency exchanges has provided a path for companies to operate legally in several states. Comprehensive federal regulation is still pending and is unlikely to be addressed before the next election.

I hope that the implementation of MiCA in Europe can serve as a valuable model for other regions, including the US, UK, Turkey, and India. I would like to see that in countries like India, where crypto is currently banned, a regulatory framework inspired by MiCA could pave the way for legalized and safe crypto trading. Similarly, Turkey has faced significant challenges with unregulated exchanges, leading to substantial losses for investors. Who would have thought that adopting a structured regulatory approach could mitigate such risks and foster a healthier crypto ecosystem?

Leading the way in cryptocurrency regulation and compliance

Here are some aspects of how leaders advocate for smart crypto industry regulations to reshape the European crypto market:

• Commitment to transparency. Regulated and compliant entities leverage blockchain technology within their centralized infrastructure, increasing transparency and efficiency. This approach is evident in the implementation of blockchain technology in internal transactions. These integrations ensure that all transactions are traceable and secure, aligning with the rigorous standards expected of regulated companies.
• Strict compliance monitoring. A key aspect of regulatory compliance is the monitoring system. It includes internal compliance teams and external auditors who conduct biannual reviews to ensure adherence to all regulatory requirements. A notable feature of the compliance infrastructure is the Live Audit Log Server. It records all actions within the system, especially from the back office, providing 24/7 access to external authorities for real-time monitoring. This system ensures that any irregularities are quickly identified and addressed, reinforcing the company’s commitment to transparency and security.
• Preparing for the future through strategic investments. Strategic investments should extend beyond compliance to focus on integrating new technologies. By staying engaged with current market trends, companies aim to incorporate the latest advancements into their ecosystem. This approach not only enhances their service offerings but also ensures they remain at the forefront of industry developments.
• Expansion of regulatory licenses. The companies are working to obtain additional regulatory licenses to expand their service offerings. One of their goals is to acquire the Markets in Financial Instruments Directive (MiFID) license, which allows them to provide regulated derivatives trading in Europe. This move is poised to address a significant gap in the market by offering a transparent and compliant platform for futures and perpetuals trading.
• Adaptation to the global market. In addition to Europe, the companies are also eyeing the US market despite the current regulatory uncertainties. By obtaining Money Transmitter Licenses (MTL) in several states, they plan to strategically expand their presence in the US. This expansion underscores their commitment to navigating complex regulatory landscapes to offer safe and compliant services globally.
• Innovating for the future. The long-term vision includes developing a comprehensive financial super-app, integrating a wide range of services into a single platform. The companies are interested in leveraging blockchain technology to reduce transaction fees and improve the overall user experience, further driving adoption.

Conclusion

The implementation of MiCA represents a significant step towards establishing a safe and transparent cryptocurrency market in Europe. While I expect the transition to be challenging, the long-term benefits of improved regulation, increased institutional investment and greater market stability are substantial.

Furthermore, MiCA’s framework can serve as a model for other regions seeking to regulate their crypto markets effectively. As the global crypto industry continues to evolve, the lessons learned from Europe’s regulatory journey will be invaluable in shaping the future of digital assets worldwide.

As the cryptocurrency industry continues to mature, the importance of robust regulatory compliance cannot be overstated.

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