Regulating the unregulatable? Markets in Crypto-Assets (MiCA) and European Crypto-Assets Regulation

The EU has reached a provisional agreement on rules to regulate crypto-assets in Europe. As stated in their press release, the European Council presidency and parliament have agreed on the Markets in Crypto-Assets (MiCA) proposal to cover unbacked crypto-assets, “stablecoins”, trading venues and crypto-asset wallets.  The Council maintains that the proposed regulatory framework will “protect investors and preserve financial stability, while allowing innovation and fostering the attractiveness of the crypto-asset sector.”

What is Covered under MiCA?

MiCA’s key provisions will cover market abuses within the crypto space, including market manipulation and insider dealing, as well as requiring actors in crypto-asset markets to declare details of their environmental and climate footprint based on standards to be developed by the European Securities and Markets Authority (ESMA).

When it comes to money laundering concerns, MiCA will require the European Banking Authority (EBA) to keep a public register of crypto-asset service providers (CASPs) that fail to comply. MiCA will also require CASPs whose parent company is located in countries either considered at high risk for anti-money laundering activities or that are considered non-cooperative jurisdictions for tax purposes, will be required to implement enhanced checks in line with the EU anti-money laundering framework.

MiCA also aims to have an impact in the “stablecoin” space. Stablecoins are crypto-assets that attempt to peg their market value to some external reference (whether that be fiat currency, commodities, or even other crypto-assets).  MiCA will require stablecoin issuers to build up a liquid reserve of their backing assets with a 1/1 ratio and allow any owners of stablecoins to be offered a claim on their proportion of those backing assets at any time and free of charge.

MiCA further singles out “asset-referenced tokens (ARTs)” as requiring particular regulation due to issues of monetary sovereignty. ARTs are a subspecies of stablecoins that typically peg their value to a single fiat currency (such as the USD Coin, pegged to the US Dollar). Issuers of ARTs will need to have a registered office in the EU to allow for proper supervision and monitoring.

Notably missing from MiCA are specific provisions relating to Non-Fungible Tokens (NFTs) – the European Commission will apparently be investigating the NFT market over the next 18 months and will put forward further legislative proposals if it deems it necessary.

Will it Work?

The primary goal of MiCA is to “protect consumers against some of the risks associated with the investment in crypto-assets, and help them avoid fraudulent schemes”, however it is, as yet, unclear what the consequences of breaching MiCA’s provisions will be.

While it does initially seem valuable to make insider dealing and market manipulation explicitly illegal in the crypto-sphere, the provisions do not seem to assist with the true challenge facing those who have been the victim of cryptofraud: not obtaining a court order but enforcing that order and reclaiming their funds.

Likewise, having a central register of non-compliant CASPs may seem like a solid regulatory step, however the entire crypto-ecosystem is designed to be as decentralised as possible with new currencies, tokens, assets and projects being created, traded, worked on, and used to defraud people on an hourly basis. By Motley Fool’s reckoning, there are now more than 12,000 different cryptocurrencies, with the number doubling from 2021 to 2022. It remains to be seen how a central register would keep up.

Then there is the question of what, if anything, the EU could do about a non-compliant CASP. In the real world, if a shop failed to obey health and safety regulations, for example, then it would eventually be shut down. To “shut down” a blockchain, one would have to delete it from every computer running it, wherever that machine is in the world. Needless to say that this would be very challenging, both administratively and on a jurisdictional basis.

Conclusion

Difficulties notwithstanding, by provisionally agreeing to MiCA, the EU has taken a vital first step towards attempting to ‘tame the wilderness’ and bring a degree of control to the crypto-sphere. It is important to not let perfect be the enemy of good in circumstances such as these and there will no doubt be several jurisdictions around the world (the UK included), who will be watching the implementation of MiCA very closely and learning from its consequences.

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