Exploring the EU’s Comprehensive Framework for Cryptocurrency: Know more
The first major jurisdiction to pass a crypto law is the European Union – bringing legal certainty, compliance challenges, and global implications. As part of its Markets in Crypto Assets regulation, MiCA, the European Union will be the first major jurisdiction in the world to introduce comprehensive, tailored regulations for this sector starting in 2024. The new crypto measures have been developed to ensure that there is an improvement on legal certainty for firms by accumulating almost 20% of global GDP in 27 nations.
MiCA’s governing rules’ which is a long document, are based on existing EU regulations for buying stocks and bonds, this can make it difficult for firms not used to following laws, find complying hard. However, it is more than just a direct reproduction of the regulations for stocks and bonds.
Any company wanting to provide crypto services in the bloc – whether it’s custody, trading, portfolio management, or advice – must be authorized by one of the financial regulators of the EU’s 27 member states. No organization can offer crypto assets to the public without publishing an honest white paper that does not delude its clients and discloses danger logically.
MiCA Regulations are not forcing crypto into predefined regulatory categories, rather they adjust current regulations so that they can accommodate innovative financial tools that are used in payments, investments and other purposes too. Cryptocurrency white papers can be published before they receive approval from the regulators, unlike prospectuses for securities.
European Union Member States aim to tempt cryptocurrencies industry with more sophistication through finesse, leaving implementation of common norms mainly to national regulators. Right now, the leading contender among all countries is France when it comes to possible locations where behemoths like Binance or Circle might set up shop.
MiCA contains a large section for stablecoins, which are digital money linked to other resources’ values. The legislators’ objective in addressing the potential dangers associated with Meta’s Libra currency, now referred to as the Diem, was reified by the destabilized state that USDT assumed in 2022.
Stablecoins, known in MiCA as “e-money tokens” (EMTs) if linked to the value of a fiat currency, or “asset-referenced tokens” (ARTs) otherwise, must have adequate reserves and be well-managed. The more widely the tokens are used, the more stringent the constraints become: stablecoins not pegged to an EU currency will be barred from having more than 1 million transactions per day, as lawmakers do not want the euro to be replaced. The rules also apply to Terra-style algorithmic stablecoins that rely on automated coding to maintain value.
The EU’s Comprehensive Framework for Cryptocurrency
The EU crypto industry has been broadly supportive of MiCA, but the potential costs of failing to meet standards are significant. Those found to be in noncompliance could face million-euro penalties of up to 12.5% of annual turnover. In exchange, licensed cryptocurrency or cryptocurrency framework providers receive a “passport” to operate across a population of 450 million people. They also gain certainty about the rules of the game, which some believe is critical for persuading the legally cautious traditional finance (TradFi) sector to enter the crypto space.
Proposed in 2019 by EU watchdogs following a wave of suspicion creating ICO frenzy, MiCA has been a subject of ceaseless debates by governments and politicians throughout the years, and the EU crypto law or EU’s Comprehensive Framework is far from being passed. The law faced a lot of controversy during its passage. There are still issues that need to be resolved. At one point, lawmakers seemed to favor limiting the use of energy-hungry P2W technology by the biggest cryptocurrencies. These restrictions – which some called an effective ban on Bitcoin – were dropped in the final bill, though crypto companies are still required to disclose their environmental effects.
However, there are still uncertainties surrounding the final agreement. Some fear that restrictions on dollar-based stablecoins could impede some decentralized finance applications. Whether or not it applies to NFTs also remains a question mark. Regulators may need to scrutinize individual tokens to determine whether they are distinct or interchangeable. It is also unclear whether the EU will be able to enforce its rules against crypto companies abroad. EU agencies ESMA and EBA will have to take on some of the heavy lifting – from creating application forms to outlining how stablecoin limits and environmental disclosure will be implemented. They have already begun consulting on some of these topics, and more are likely to follow.
The Worldwide Impact
The impact of MiCA could extend beyond the EU. One of the reasons for this is the “Brussels effect”: multinational companies tend to operate under a single set of rules, so innovative EU legislation or EU crypto law in areas like online data protection quickly becomes the standard around the world. Legislators around the world may also be tempted to follow the lead of the EU. A bipartisan delegation of staff from the US Congress visited Brussels in early 2023 to seek regulatory advice. Representatives and lobby groups in countries such as the UK and US have argued that a clear EU’s comprehensive framework could draw in business and that they would need their own legislation to keep up with it.
The EU’s comprehensive framework is likely to support them, because it does not want to be outmaneuvered by crypto sanctuaries. “There’s no point in the EU trying to regulate a world-wide sector,” the European Commission said. Standards set by international agencies such as the FSB also appear to be influenced by and largely in line with MiCA.
The Markets in Cryptocurrencies Act (MiCA) is set to enter into force on 30 December 2024. However, stablecoin provisions will enter into force six months earlier, i.e. in June 2024. This is a transitional period to allow industry and regulators to prepare for the introduction of MiCA. Other EU legislation also has an impact on the crypto sector, covering issues such as money laundering, tax evasion, bank capital, cyber security, and securities trading based on distributed ledger technology. Future legislation could use the regulatory categories created by MiCA as a reference. The commission will issue a report by mid-2025 on whether additional legislation is needed to address NFTs and decentralized finance, and European Central Bank chief Christine Lagarde has called for a follow-up to address crypto lending and stakeholder staking. Some argue that recent market volatility highlights the need for stricter regulation. They have called for abandoning the “tailored approach” of MiCA altogether in favor of a more traditional securities model.
