Against the backdrop of a crashing market and burned investors, EU negotiators sealed a landmark political deal late Thursday that governs how the bloc will regulate crypto.
The market in crypto assets bill, dubbed MiCA, will set industry standards and investor safeguards for crypto assets and companies that service them. The rules will come into force late next year or early 2024, depending on when they’re published in the EU’s official ledger for legal acts.
Negotiators from the European Parliament, EU capitals and the European Commission needed just six hours in the final round of talks to seal the deal, which comes as the battered market is exposing corporate scandals, Ponzi schemes and false promises of riches.
Much of the technology underpinning the market, however, has won favor among policymakers and companies that are determined to lower transaction fees and democratize finance.
MiCA is supposed to give investors more confidence when operating in the market, complete with a new EU supervisory structure for so-called stablecoins and safeguards to ensure crypto companies are liable for the products and services they offer. That’s one reason why the crypto industry hailed MiCA as a milestone for setting the world’s first major regulatory standard for digital assets.
But it’s worth remembering that the origin of the rules was rooted in fear.
The Commission proposed MiCA in September 2020 in response to the failed bid of Meta, Facebook’s parent company, to introduce a payment system with a so-called stablecoin — a token that’s tied to a national currency or a basket of financial instruments to keep its value steady. Meta’s plans sent EU policymakers into a panic, fearing that the global reach of the social media behemoth would undermine the euro.
“What Europe’s policymakers have called for in response to these concerns may … seem onerous and anti-innovation to MiCA’s detractors,” Dante Disparte, chief strategy officer and head of global policy for the stablecoin startup Circle, wrote in a blog Thursday ahead of the deal.
“But deeper down it offers a pathway for Europe to emerge as a competitive region for the safe, sound development of an always-on financial system,” added Disparte, who used to lead policy and communications for Meta’s payment project.
That said, much has since changed in the last two years. Crypto’s popularity skyrocketed during the pandemic, aided by armchair investors with money to burn. All this attention sent the market’s value to an all-time high of $3 trillion in mid-November — before it nose-dived by more than two-thirds on the back of rising interest rates and a sharp bearish correction. That downturn exposed the risks that many crypto companies took to make money.
Another big change has been the proliferation of new products and services within the crypto sphere — a development that MiCA also touches on. These include digital collectibles, known as non-fungible tokens (NFTs), which got headlines after celebrities paid thousands of dollars to own virtual collections of art, such as the Bored Ape Yacht Club and Moonbirds.
Decentralized finance, dubbed DeFi, also came to the fore, unveiling computer programs that can execute agreements on “smart contracts” without the use of a middleman.
Advocates say DeFi and NFTs can lower the cost of transactions and open new sources of revenue for artists and companies. Policymakers recognize these legitimate uses but are determined to prevent anyone from using them for laundering dirty money or dodging taxes.
To make sense of the new legislation, POLITICO offers a round-up of some of its most important policy decisions.
National authorities will be responsible for supervising crypto companies and the assets they issue or handle. These authorities must, however, share the data they collect on crypto companies that have more than 15 million users with the EU’s securities regulator.
This marks a victory for EU capitals, which had advocated a national approach to crypto supervision. The Parliament had hoped to give the European Securities and Market Authority (ESMA) more powers to police Europe’s crypto market.
However, ESMA did win some new duties. The regulator will be able to issue opinions on how to promote supervisory convergence, and it can ban crypto assets or services that are a threat to investors, market integrity or financial stability. It’s important to note that ESMA already has these powers for the wider financial market.
The European Banking Authority, meanwhile, will supervise stablecoins that have more than 10 million users or a reserve of assets that are worth more than €5 billion. That said, the European Central Bank will be able to veto any stablecoin it doesn’t like.
MiCA comes with a blacklist: ESMA will name and shame any crypto companies that fail to comply with the new rules and put them on a roster as a warning to investors.
The red-flag criteria can go beyond a failure to comply. A company that refuses to register in a country or makes a conscious effort to operate outside legal structures can also land on the blacklist, while shady board members are sufficient grounds to get a company into trouble.
There’s been much debate within the Parliament over the amount of energy that’s needed to power the specialized computers that process and record crypto transactions on decentralized ledgers, known as the blockchain.
Most crypto assets, including Bitcoin, run on a blockchain software called Proof-of-Work, which requires a huge amount of electricity to operate. But there are more energy-efficient alternatives on the market, known as Proof-of-Stake. Crypto companies will have to disclose what type of blockchain they’re using in an informational document, called a whitepaper.
ESMA will develop further measures that will spell out what these disclosures should look like. The Commission, meanwhile, will write up a report that compares the different types of blockchain technologies on offer and present policy options for decision-makers to consider.
Quick crypto fixes
DeFi and NFT have largely been left out of MiCA, although there’s a review clause baked into the rulebook that will likely lead to specific regulatory regimes at a later date, if needed. That said, MiCA does include some direct references to the two fields. Any crypto company that decides to service digital assets that stem from DeFi, for example, will have to comply with the legislation.
As for NFTs, the rulebook excludes them unless the issuer creates a “collection” of assets for purchase. The idea behind this is to allow artists and firms to create individual digital assets without being buried in regulatory paperwork.
Companies behind NFT collections, however, will have to provide a whitepaper that explains what their product is and how they operate on the blockchain. Moreover, any NFT that replicates a financial instrument will be roped into MiCA.
“This regulation will help to move crypto markets away from the dodgy backwaters of the internet by applying minimum standards that are similar to other types of financial services,” German MEP Markus Ferber of the European People’s Party said after the deal. “With this new law, the EU is taking the lead in regulating crypto.”
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