(Bloomberg) -- European lawmakers on Thursday gave their final blessing to an ambitious law that will give the European Union its first rules to govern the crypto industry.
The approval of the EU’s Markets in Cryptoassets, or MiCA, regulation is the first time that governments have tried to supervise the upstart industry on such a scale and follows the collapse of several big players including the crypto exchange FTX.
European Financial Services Commissioner Mairead McGuinness said on Wednesday that she expects the legislation to come into force in July after it’s formally approved by the bloc’s 27 member states. Specific requirements will take effect progressively, with rules governing stablecoins, for example, set to apply from July 2024.
MiCA, in development for three years, has been welcomed by crypto executives as an alternative to the US approach of policing the sector through enforcement actions. Yet critics say the law is outdated before even taking effect as it would do little to prevent several of crypto’s recent high-profile blowups, and there are already calls for updates.
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The final approval “marks the start of a new era of regulatory scrutiny on unregulated crypto markets, which have caused massive losses to many first-time investors and provided a safe haven to fraudsters and criminal organizations for over a decade,” said Ernest Urtasun, shadow representative on MiCA and a parliament member for the Greens. Yet “important regulatory challenges remain unaddressed and new legislative actions are urgently needed to complete MiCA with the missing pieces.”
Once implemented, MiCA will require any company offering crypto-related services in the EU to gain registration in one of the bloc’s member states, which then allows them to operate across the entire bloc. The European Banking Authority and the European Securities and Markets Authority will be in charge of making sure crypto platforms comply with the rules, including having adequate risk management and governance processes to avoid another FTX-style collapse.
A unified EU-wide regulatory framework will likely make the bloc more attractive to digital-asset companies and put pressure on other jurisdictions to follow suit, said Alisa DiCaprio, chief economist at enterprise blockchain firm R3. Europe has been taking market share in crypto venture capital investment from the US, data from PitchBook show.
“It would be a surprise if other jurisdictions like the UK and the US aren’t quick to follow suit and further accelerate their crypto regulatory efforts,” DiCaprio said.
“We are putting safeguards in place that would prevent companies active on the EU market from engaging in some of the practices that led certain cryptoasset operators to collapse,” McGuinness said during the parliament debate. “As we have seen in recent months, stringent rules and supervision are very much needed because we’ve had the collapse of projects such as FTX, Terra Luna, Celsius and Voyager.”
She added: “While the crypto market is still too small to trigger systemic risks, we also know that there are increasing links between crypto markets and traditional financial services.”
The text won preliminary approval last summer, but doesn’t include rules to govern parts of the sector that were at the heart of last year’s biggest failures.
Crypto lending, decentralized finance and nonfungible tokens are all beyond MiCA’s scope, leading some figures including European Central Bank chief Christine Lagarde to already make calls for a MiCA 2.
Crypto firms have taken issue with MiCA’s regulation of stablecoins — digital tokens that aim to keep a one-to-one value with a more stable asset like the US dollar — where operators will be required to maintain local reserves and face trading caps on non-euro-denominated tokens that aren’t backed by fiat currency.
Undermining Anonymity
The need to comply with the bloc’s Travel Rule will also undermine the sector’s ability to provide anonymity to users, critics have said, forcing exchanges to provide information on senders and recipients for every transaction to authorities and pay particular scrutiny to self-hosted wallets sending more than €1,000 ($1,097).
Firms have another year or two to get to grips with MiCA before they’re expected to comply. The rules on stablecoins will come into effect from July next year, while the broader regulation of cryptoasset service providers and the expectation for them to meet the Travel Rule will be enforced from January 2025.
Overall, crypto executives say it’s better than no guidance at all. The recent US approach of leading with enforcement action against big players, instead of pushing ahead with sector-specific legislation, has led big names like Coinbase, Circle and Binance to beef up their presences in Europe, with Coinbase CEO Brian Armstrong on Tuesday saying “anything is on the table” when it comes to its future operational footprint.
The lengthy development and delayed implementation of MiCA has led to crypto firms being left in a “transition period,” Coinbase vice president for business development Nana Murugesan said, where they’re needing to seek licenses in multiple EU states until passporting comes into effect.
“Once MiCA comes in, it’ll become much more of a pan-European bloc strategy,” Murugesan said in an interview on Monday, adding that he views Europe’s regulation of crypto as still a “work in progress.”
(Updates with comment from executive in eighth paragraph.)
©2023 Bloomberg L.P.
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