MiCA The Benefits, Drawbacks, and Ugliness of EU Cryptocurrency Regulations

MiCA EU Cryptocurrency Regulations - Pros, Cons, and Criticisms

Author: Mike Sarvodaya, Cointelegraph; Translation: Song Xue, LianGuai

Despite the hostile claims from the chairman of the U.S. Securities and Exchange Commission, Gary Gensler, and other U.S. regulatory agencies, who have claimed to have been “clear for years” regarding cryptocurrencies, the European Union took practical action in April by passing the Markets in Crypto-Assets Regulation (MiCA). Although MiCA is not perfect, it is a crucial step in the right direction for our industry and sends a signal to the United States: if we continue to stagnate and rely on outdated regulations, we will be left behind.

Just as Bitcoin utilizes old technologies, economic concepts, and financial ideas to build something new, regulatory agencies must redesign existing regulatory and financial security frameworks to create a conducive environment for participants. There are many useful and effective elements in our existing financial and regulatory frameworks.

On the other hand, the blockchain industry faces many problems that traditional regulatory frameworks cannot adequately address. This leads to frustration and wasted resources as lawyers engage in endless debates over potential interpretations of statements instead of adhering to clearly defined legislation.

Although the practical applications of Web3 show enormous potential, it is still a recombination of the traditional financial system, albeit one committed to improving efficiency, openness, and fairness for all participants.

MiCA: A Necessary but Mediocre Step in Regulation

Although the wording of financial and securities regulations is complex, the situation is actually simpler than it appears on the surface. In short, our regulations attempt to prevent people from doing harm to others. For example, terrorists sending or receiving funds to facilitate terrorist activities or fraudsters making fraudulent claims to investors. It also involves ensuring that licensed individuals and entities are accountable to a set of operational standards established throughout the history of modern financial markets.

In more technical terms, the laws that govern these operational standards are:

  • Anti-Money Laundering and Counter-Terrorist Financing Laws

  • Securities and Commodities Laws

  • Market Infrastructure Regulation

Although the SEC insists that existing regulations broadly cover these three issues, many elements have not been reflected in these definitions, rules, and penalties that were established around 100 years ago. We can attribute this problem mainly to two factors.

First is the classification of digital assets. Are they commodities or securities, or do they belong to an entirely new category? Digital currencies often exhibit one or both of these characteristics or neither, which presents a significant challenge to existing frameworks.

An overview of MiCA. Source: Circle

Second, the speed of innovation far exceeds the adaptability of the slow and complex traditional financial regulatory framework. Governments have a responsibility to establish robust regulations to prevent misconduct and protect stakeholders’ interests, while also being flexible enough to accommodate the progress promised by this emerging industry. How can these institutions compete with smart contracts that can be deployed within minutes and upgraded on the same day with completely different logic and parameter sets?

It is evident to those in our rapidly evolving industry that we need new regulations and guidelines that align with the unique advantages and challenges provided by Web3.

MiCA is a hopeful attempt, although the framework will face challenges as EU member states test it in their national courts and create a patchwork of differing outcomes. That being said, these are the advantages, disadvantages, and pitfalls of MiCA.

MiCA: Benefits

The best part about MiCA? Stricter rules and greater penalties for crypto asset service providers that lose customer funds! This has been a longstanding issue in the cryptocurrency space, where exchanges and wallets bear no responsibility and result in billions of dollars in losses when they are hacked or compromised, causing irreparable damage to many in our industry.

MiCA: Drawbacks

Although it sets out the main objective of preventing market manipulation, most manipulation occurs outside the EU (through offshore entities), so it does not directly help many. However, it may indirectly help as it signals the direction regulators are moving towards – although this also depends on the penalties imposed when cases are brought before judges.

It is worth noting that decentralized finance and future central bank digital currencies are excluded. While the exclusion of DeFi may be seen as a positive factor, the majority of on-chain transactions and activities are in DeFi, and it is frustrating that this is overlooked.

MiCA: Pitfalls

Unfortunately, MiCA has many worrisome or “ugly” elements that readers must be aware of, not just because they are EU citizens.

  • The “travel rule” greatly enhances the monitoring and recording of financial transactions and online activities in unprecedented ways, forcing service providers to identify the recipients and senders of each transaction.

  • Compared to the traditional threshold of $10,000 in US banks, the extremely low reporting threshold of €1,000 leads to increased regulatory scrutiny. Considering that the majority of financial misconduct is carried out by large banks and institutions through money laundering and other fraudulent activities, subjecting ordinary people to Orwellian scrutiny is infuriating.

  • Formal approval from legislators is required before launching tokens or liquidity. This will directly or indirectly greatly hinder the number of legitimate projects launched within the EU. It is hard to assume that the queue will be short and the process will be fast – governments have repeatedly shown that they are slow and inefficient, especially when it comes to new technologies.

Any regulation in the European Union has another core issue worth repeating: the decentralization of the EU court system makes it difficult to draw meaningful conclusions about the impact of individual future rulings. In short, this is a small victory for Web3, which requires regulatory agencies around the world to do more work.

This is in stark contrast to the US court system, which traditionally (although not Web3) is a unified and solid legal decision-making foundation. A series of scattered rulings makes it less likely for other countries to truly follow MiCA at full speed; instead, they may wait for the US to come up with its own substantive framework and regulatory guidelines.

Regulators, exchange operators, and founders have all stated that they will proceed very cautiously and slowly until a substantive set of regulatory guidelines is formulated in the United States. While they may draw some inspiration from MiCA, it is not their guiding light.

For regulators and users, the blockchain industry is at a crossroads. Countless people’s lifelong savings have been wiped out due to fraud and scams, while regulatory agencies are struggling to keep up with the rapid pace of industry innovation.