The European Union’s Markets in Crypto Assets regulation, MiCA, is due to take effect in 2024, making it the first major jurisdiction in the world to introduce comprehensive, tailored rules for the sector.
New crypto measures, which aim to facilitate legal certainty for businesses and attract more investment to the region, will apply in 27 countries that collectively represent nearly one-fifth of the global economy.
It’s usually pronounced mee-kuh, by the way. Here’s what the law contains, its controversial issues and what’s next.
MiCA’s 150-odd pages are based on existing EU rules for securities trading – and compliance could prove tough for companies new to regulation. But it’s not merely a copy and paste of the rulebook for stocks and bonds.
Any company seeking to offer crypto services within the bloc – whether that’s custody, trading, portfolio management or advice – will need to be authorized by one of the EU’s 27 national financial regulators.
Any company offering crypto assets to the public will also need to publish a white paper which is fair and clear, warning of risks without misleading potential buyers.
MiCA doesn’t shoehorn crypto into existing regulatory boxes, but adapts existing rules to fit innovative instruments that can be used for payments, investment and more besides. Unlike securities prospectuses, for instance, crypto white papers can be published before regulators approve them. The framework also contains provisions to curb market abuse and insider dealing – similar to guardrails set up for traditional finance.
While following common rules, national regulators will in practice do most of the enforcement, and EU states could compete to attract crypto business by doing so more slickly. A leading contender is currently France, which seems set on becoming a European hub for major firms like Binance and Circle.
Treatment of stablecoins
Stablecoins – known in MiCA as “e-money tokens” (EMTs) if linked to the value of a fiat currency, or “asset-referenced tokens” (ARTs) otherwise – will have to hold suitable reserves, and be well-governed.
Constraints get tougher the more widely the tokens are used: stablecoins not pegged to an EU currency will be outright banned from having over 1 million transactions per day, as lawmakers don’t want to see the euro supplanted. The rules also apply to Terra-style algorithmic stablecoins that seek to use automated coding to maintain value.
Incentives for the European crypto industry
The EU crypto industry has been broadly supportive of MiCA, but the potential costs of not meeting standards are high. Those deemed in noncompliance potentially face million-euro penalties that could be as high as 12.5% of annual turnover.
In return, licensed crypto providers get a “passport” to operate across a bloc of 450 million people.
They also get certainty about the rules of the game – which some see as vital to persuade the legally cautious traditional finance (TradFi) sector to venture into crypto.
Originally proposed by EU watchdogs in 2019 after a tide of initial coin offerings (ICOs) raised fears over fraud and manipulation, and then deliberated upon by governments and lawmakers over several years, MiCA’s journey still isn’t finished.
The law courted controversy during its passage, and there are still issues to iron out.
Advantages of MiCA
Disadvantages of MiCA
Tough rules to meet
Rules tailored to fit crypto
Million-euro fines for getting it wrong
Credibility to wary customers
Caps on USD stablecoins
One license to operate across the bloc
NFTs a gray area
Attract TradFi investment
Unclear how overseas enforcement will work
At one stage, lawmakers appeared to favor curbs on energy-intensive proof-of-work technology used by major cryptocurrencies. In the final draft, those measures – which some characterized as an effective bitcoin ban – were abandoned, though crypto firms must still disclose environmental impacts.
But there are still concerns over the final deal. Some worry curbs on dollar-denominated stablecoins could stop some decentralized finance applications in their tracks.
Whether it applies to non-fungible tokens (NFTs) also remains a gray area, and regulators may have to pore over individual tokens to judge if they’re unique or interchangeable.
It’s also an open question whether the EU will succeed in enforcing its rules against crypto firms overseas.
EU agencies the European Securities and Markets Authority (ESMA) and European Banking Authority (EBA) will have to fill in some of the details – from designing application forms, to defining how stablecoin caps and environmental disclosures will work. They have already started consulting on some of those topics, with more to come.
Legislators overseas may be inspired by the bloc’s crypto example. In early 2023, a bipartisan delegation of staffers from the U.S. Congress even visited Brussels to get some regulatory tips. Lawmakers and lobbyists in places like the U.K. and U.S. have argued the EU’s clear framework could attract business, and that they need their own laws to keep up.
The EU will encourage them, as it won’t want to be undercut by crypto havens. The European Commission’s Mairead McGuinness has said there’s “no point” in the EU seeking to regulate a global sector if the rest of the world doesn’t follow suit.
Standards being set by international bodies such as the Financial Stability Board also appear influenced by, and largely compatible with, MiCA.
What’s next for crypto regulation in Europe?
MiCA applies as of Dec. 30, 2024, with stablecoin provisions taking effect six months earlier in June – a hiatus designed to give industry and regulators time to prepare. But MiCA won’t be the final word.
By mid-2025, the commission will report on whether further laws are needed to cater for NFTs and decentralized finance, and the European Central Bank’s Chief Christine Lagarde has already called for a sequel to deal with crypto lending and staking.
Others argue that recent market turmoil shows the need for tougher rules. They have called to abandon the tailored approach of MiCA altogether, in favor of one more closely modeled on conventional securities.