Recent cryptocurrency developments: the EU paves the way with MiCA regulation

The capabilities of crypto – a digital and decentralised currency – are unmatched. It is a form of payment or trading that can be used all over the world as long as the internet is accessible – it is not bound by borders and its markets are global.

As we embrace technology, global financial markets are moving towards digitised systems – from bank statements to payments, everything is going paperless. To keep up with the growth of crypto, and to welcome the opportunities it presents safely, regulators are looking to construct sufficient regulatory frameworks which strike the right balance of customer protection, solving financial crime and igniting innovation.

Over the last week, we saw key developments in cryptocurrency regulation. Paving the way, on 5 October, the European Council passed the laws under Markets in Crypto Assets (MiCA), after reaching a provisional agreement on MiCA’s foundational principles on 29 June 2022.

Under MiCA’s rules, crypto assets will be traced in the same way as fiat currency transfers as well as protecting investors and preserving financial stability.

What’s new with MiCA?

If MiCA is approved by the European Parliament this week, cryptocurrency providers will have to implement changes and follow the regulations by 2024.

The EU embraces the digital age and technological advancement by welcoming the benefits cryptocurrency can bring and has said that it wants to ensure that the “Union’s financial services legislation is fit for the digital age and contributes to a future-ready economy that works for people, including by enabling the use of innovative technologies.” Crypto has the “potential to bring significant benefits to both market participants and retail holders of crypto-assets.”

However, the lack of regulation can lead to financial crime and bad market integrity – MiCA has been welcomed as it promises to bring a level of certainty around how crypto assets should be treated within an applicable legal framework. For example, in the last few months alone there have been several crypto hacks such as $570 million worth of Binance’s BNB token being stolen. Without adequate regulatory frameworks, it is difficult to combat financial crime and protect customers from criminal behaviour.

The EU believes that MiCA can “promote financial stability, the smooth operation of payment systems, and address monetary policy risks that could arise from crypto-assets.” The regulations address crimes such as money laundering, look to improve consumer protection,  consider the environmental impact of crypto, and increase accountability for wrongdoers – among other things.

Key MiCA takeaways

• It will no longer be anonymous – those transacting in crypto will need to reveal their identities.

• MiCA includes regulatory suggestions for unbacked crypto assets, trading venues and wallets, and stablecoins.

• Crypto is separated into four different categories: crypto-assets, utility tokens, asset-referenced tokens (ART) and electronic money tokens (e-money or EMT). The different regulations depend on which category the crypto-asset falls under.

• Third-party providers that safeguard consumers’ crypto assets from theft or loss must be based in the EU. As well as this, providers will need to safeguard customer funds in bank accounts separate from their own funds. (However, the majority of custodial service providers are located outside of the EU).

• Crypto firms will have to declare their carbon footprint.

• The European Securities and Markets Authority is required to register non-compliant crypto firms and will need to keep a list.

• If consumers lose crypto assets, crypto asset firms will be liable for these losses unless they can provide evidence that the loss was not their fault. There will be strong requirements to protect consumer crypto wallets.

• Regulations will reduce insider trading as well as any illegal insider information distribution and crypto market manipulation.

• Any stablecoins from outside of the EU and used by a non-EU bank for custody are considered an ART. Whereas EMTs are Euro-denominated and EU bank-backed firms.

• The European Banking Authority can veto any ART issuers that they believe are a threat to the EU monetary sovereignty.

Full details on the MiCA regulations can be found here.

US cryptocurrency regulation developments

In the same week as MiCA, there have been cryptocurrency developments in the US, too. The US Financial Stability Oversight Council (FSOC) has detected gaps in the regulatory oversight of digital assets such as cryptocurrency and stablecoins. In a recent report, the FSOC has suggested how Congress and other federal regulators can bridge these gaps.  

It concluded that trading in cryptocurrency  could “pose risks to the stability of the U.S. financial system” if there is no “appropriate regulation.” It looks as though the US could soon be following in the footsteps of the EU.

“Many crypto-asset activities lack basic risk controls to protect against run risk” and the prices “appear to be primarily driven by speculation rather than grounded in current fundamental economic use cases.”

The FSOC highlighted three gaps in crypto regulation:

• The spot markets for crypto-assets that are not securities will be subject to federal regulation. “Those markets may not feature robust rules and regulations designed to ensure orderly and transparent trading, prevent conflicts of interest and market manipulation, and protect investors and the economy.”

• Crypto-asset firms don’t have consistent and thorough regulations which can lead to market manipulation. Some businesses may even have affiliates working under different regulations, thus, there isn’t a single regulator that oversees the risks across the whole business.

• Many crypto-asset trading firms have started offering consumers access to markets through broker-dealers or futures commission merchants. This, in turn, creates gaps in financial stability and investor protection implications.

In response to the FSOC’s report, Securities Exchange Commissioner (SEC) Chair, Gary Gensler said, “crypto cannot exist outside of our public policy frameworks, regardless of what the crypto industry initially expected or what certain market participants might say today.  The policy frameworks include protecting investors and consumers, guarding against illicit activity, and supporting financial stability.”

Gensler is looking forward to working with Congress and colleagues to “achieve public policy goals,” and “enhance the investor protection and resiliency of the crypto market.”

CUBE comment

We can’t deny the immense growth cryptocurrency has achieved in the last year alone. According to Blockchain data platform, Chainalysis’ recent report, in the Middle East and North Africa, a whopping $566 billion in cryptocurrency was received between July 2021 and June 2022 – a 48% increase from the previous year. This just goes to show the huge popularity of cryptocurrency, and this is just for one part of the world!

With great power comes great responsibility – with more of the population utilising cryptocurrency, it’s only right for regulators to combat financial crime and protect consumers and investors from a loosely regulated industry.

The crypto industry lacks the transparency and accountability that other fiat currencies have. But regulation can solve this issue. The real question is – how can regulators govern something that was created to operate free from government hands?

The regulatory wheels for crypto may have been set in motion for many nations but the work doesn’t stop there, crypto is such a large industry that it will take time to figure out the perfect set of regulations to ensure financial stability, not to mention the Environmental, Social and Governance (ESG) impacts it brings but that’s another story…

Once the European Parliament has approved MiCA – which could be as soon as December 2022 – firms will have 18 months to prepare. For such large, far-reaching reforms, 18 months isn’t long – firms should start considering what ‘good’ compliance will look like now.

It can be overwhelming for compliance teams to be notified of even more regulations to implement, that’s why we’re here to help. CUBE can streamline complex regulatory change management and compliance processes in real-time, using data from over 5,000 issuing bodies across 180 jurisdictions. Using AI to automatically map relevant regulations to company procedures – CUBE is a compliance officer’s best friend.