Markets
What’s missing from MiCA’s comprehensive crypto manifesto?
Disclosure: The views and opinions expressed here belong solely to the author and do not represent the views and opinions of the crypto.news editorial team.
In April 2023, the European Union released a comprehensive piece of legislation to finally reign in the cryptocurrency and blockchain industry. Regulation of cryptoasset markets (MiCA) is a bold and pioneering initiative that aims to apply a unified regulatory framework to the sector and establish clearer laws for crypto asset service providers and token issuers.
Seen as a milestone in the cryptocurrency regulatory landscape, MiCA recently approved a provision to address stablecoinsthat have long been seen as complicated assets to regulate due to their unclear classification and common use in cross-border transactions. Following the approved provision, Circle, the issuer of the USDC stablecoin, became the first stablecoin issuer be formally recognized as compliant with EU cryptocurrency legislation.
The new status granted to the Circle has led many to consider the implications of MiCA in 160 billion dollars aggregate supply of stablecoins, as well as the broader cryptocurrency and web3 economy.
While the idea behind the most comprehensive attempt to regulate cryptocurrencies is to protect investors, hold accountable organizations that issue digital assets and provide services, onboard new users and foster innovation while ensuring competition, it will take some time to assess its full impact.
The idea for MiCA was born out of a wave of ICOs in 2017 and 2018 that raised concerns about scams, fraud, and other manipulations that could undermine financial stability within the European bloc. After years of research, due diligence, and good intentions, MiCA deserves much credit for its approach to balancing regulation with innovation — a clear recognition of the technological and commercial advantages of cryptocurrencies and blockchain. Furthermore, MiCA reinforces stability, investor confidence, transparency, and oversight with its comprehensive legal framework.
But MiCA has some blind spots.
While the regulatory framework recognizes the importance of bridging crypto service providers and traditional finance, it doesn’t offer much on how to make this a reality. Indeed, the growing overlap of tradfi and digital assets bodes well for driving adoption and has likely contributed to a maturing crypto ecosystem, but MiCA places limitations on stablecoins that seem counterproductive.
Non-euro stablecoins cannot be used in transactions for goods and services and face daily limitations on the number of transactions (up to one million) and their total value (€200 million). This essentially places usage limits on USDC and USDTthe two major stablecoins, even though they are certified as MiCA compliant.
And because stablecoins are so crucial to facilitating transactions, enabling DeFi, and powering nearly every aspect of the industry, these restrictions could impact liquidity and halt DeFi innovation and activity, undermining a core pillar of MiCA’s mission.
Furthermore, these limitations are compounded by MiCA’s failure to emphasize interoperability, one of the industry’s most pressing needs, nor does it appear interested in encouraging crypto-fiat payment solutions — important avenues for bolstering liquidity and spurring innovation beyond cryptocurrencies.
While it is too early to know how MiCA’s stablecoin approach will play out, European regulators can do more to address interoperability and payments across ecosystems to future-proof their economies and avoid market fragmentation. This can be improved by working with EU organizations such as Horizon Europe and the European Innovation Council to find innovative startups that address areas neglected by MiCA.
For example, Kima, an asset-agnostic, peer-to-peer money transfer and payment protocol, provides an interoperable settlement layer for interchain and crypto-fiat transactions. By removing the barriers between blockchains and between traditional financial instruments and blockchain networks or decentralized applications, the Kima protocol enables developers to access greater amounts of liquidity. This also benefits non-crypto native users and financial institutions by allowing funds to flow in all directions.
MiCA will undoubtedly serve as a standard-bearer for cryptocurrency regulation, guiding other nations and economic blocs on how to regulate a growing, complex, and volatile market that offers much promise. It is important that, in its righteous desire to protect its monetary interests, it does not neglect other areas that impact the industry’s ability to grow.
The EU has demonstrated a willingness to adapt and study trends as they emerge, and in the fast-paced world of cryptocurrencies, this is necessary to ensure appropriate measures are taken to protect investors as well as the integrity of the entire sector.