It has been known for some time that the European Union was working on a crypto law, to regulate trading, distribution and issuance. Last July, the Parliament and the Council agreed on a unified approach. What is the MiCa law? And what does it mean for the crypto world?
Table of Content
- What is the MiCa law?
- Crypto's impact on climate also included
- Strict regulation for stablecoins to protect consumers
- NFTs currently excluded from MiCa law
- The introduction and impact of the MiCa law
What is the MiCa law?
The MiCa law was created by the European Commission on 24 September 2020, to regulate crypto in EU countries. The law is part of the ''digital money package'', which ensures financial stability and protects consumers. In addition, the package should promote technological development. The aim of the package is therefore to encourage innovation within financial technologies, but at the same time protect consumers and investors.
The MiCa Act concerns a regulatory framework for crypto assets and crypto asset services. The law is a regulation, which means it takes effect immediately and enjoys primacy over national law of European Union member states. A regulation is different from directives, as directives do not have to be implemented immediately, but must be implemented in a timely manner at the national level. The MiCa law therefore directly impacts all member states and European crypto users.
Now, the European Union has agreed on a proposal for the MiCa law. The law aims at four goals:
- Legal certainty within the EU
- Protecting consumers
- Ensuring financial stability
- Increase market integrity through regulation
Legislation regulates all types of cryptoassets and companies selling cryptoassets. We see that 'Stablecoins' in particular (cryptoassets linked to the value of FIAT money, such as the US dollar and Euro) are strictly regulated. Crypto providers will have to observe strict regulations to ensure investor safety and prevent abuse and market manipulation. For instance, crypto providers are liable if they lose crypto assets belonging to investors and insider trading is prohibited. Any crypto provider wishing to offer its services in an EU member state must apply for a licence. Should a crypto provider be based in one of the 'third countries' on the EU list with a high suspected money laundering risk. Then they will have to carry out mandatory sharp controls in line with the EU anti-money laundering framework.
The law thus closes the gap between regulation of crypto-assets and its providers within EU member states, as some countries had legislation at the national level that was different in approach from other EU member states. In short, the law should put an end to the wild west of the crypto world while maintaining its appeal.
Crypto's impact on climate also included
Within two years, the European Commission will submit a report on the impact of crypto on the environment and climate. It will also then introduce mandatory sustainability standards for consensus mechanisms. These sustainability standards will particularly affect the proof-of-work algorithm.
Strict regulation for stablecoins to protect consumers
The Terra Luna and Celsius crashes have made policymakers realise that stablecoins need to be regulated. The MiCa requires the issuer of a stablecoin to prove that they have sufficient liquid reserves. This must be in a 1:1 ratio and the reserve must partly consist of deposits. In addition, every holder of stablecoins is offered a requisition by the issuer. The European Banking Authority (EBA) supervises stablecoins to ensure compliance with the rules.
NFTs currently excluded from MiCa law
Non-fingible tokens (NFTs) such as digital artwork, music and videos are currently excluded from the MiCa Act. This is because NFTs are considered classic securities, so there is no concrete threshold above which the rule could apply.
The European Commission will assess NFTs within 18 months, to submit a legislative proposal for NFTs as well.
The introduction and impact of the MiCa law
The introduction of the MiCa Act will take some time. According to the European Council of the European Union, the Council and Parliament still need to green-light this preliminary agreement before it can start being implemented. Most of the rules are expected to be introduced around the 2nd quarter of 2024.
In terms of impact, investors will be little affected. They will be better protected from abuse and market manipulation. Crypto providers and issuers in particular will feel the impact, as they will be more tightly controlled. This immediately makes it controversial as the crypto industry currently has no boundaries. As for the wild west of the crypto world, that seems to be coming to an end, at least within the EU.