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Is the crypto market ready for MiCA?

Crypto assets are evolving from a period of chaotic innovation, marked by cycles of intense boom and bust, onto a more stable path of sustainable growth. The two epochs are separated by the emergence of global regulations that give investors, consumers and developers greater certainty about the boundaries of good practice and the security of their crypto investments.

The European Union’s Markets in Crypto Assets Regulation (MiCA) is a true indication that the market is maturing and turning its back on the murkier practices that once blighted the industry.

Having identified the efficiencies that blockchain offers traditional finance (TradFi), mainstream actors, such as banks, asset managers, hedge funds and exchanges, are entering the market with products and services that harness the technology’s potential.

Regulators have concluded that the USD 2 trillion industry is here to stay and will only grow larger in the future. They also recognise the need to underpin the crypto market with a comprehensive set of rules that provide transparency and certainty for both service providers and investors.

The EU is one of the first movers, with a comprehensive set of regulations (MiCA) that clearly classifies the new breed of crypto assets and brings order to way they are issued, traded, held in custody and managed on behalf of clients (see extended definition below). The regulations incorporate anti-money laundering (AML), consumer protection, risk management and fraud prevention – allowing crypto assets to integrate smoothly with TradFi.

Europe currently lags behind the US and Asia as a crypto market, both in terms of overall users and traded volumes. But the region has the potential to become considerably larger. This development can be given a helping hand by neighbouring regions like Switzerland and Liechtenstein, which already have established frameworks for handling crypto assets, and the UK, where new regulations are being developed.

MiCA is being unveiled in two phases, starting with the regulation of stablecoins from June 30, 2024, until the entire rulebook comes into play at the end of this year. This will encompass a variety of ‘Crypto Asset Service Providers’ (CASPs), ranging from crypto asset issuers, crypto exchanges, custody providers and those offering TradFi services such as credit and asset management.

The impact of MiCA so far

A few crypto exchanges, such as Bitstamp and Uphold, have delisted stablecoins that do not comply with MiCA, including Tether’s USDT, Dai and Frax.

Binance is restricting the availability of unauthorised stablecoins for its European Economic Area (EEA) users, while Kraken is reviewing its regulatory compliance options in Europe including Tether’s status under the new MiCA rules.

This is because MiCA demands that stablecoin issuers must have an e-money or credit institution license and provide clear details about the nature of their product and the potential risks to consumers.

In addition, stablecoin issuers must prove that they hold sufficient reserves of adequate quality and that they have plans in place to protect consumers in the event of bankruptcy.

These rules could change the balance of stablecoin influence in the EU. Tether remains reluctant to comply with MiCA’s stringent requirements while Circle became the first global stablecoin issuer to claim a MiCA license for its stablecoins in Europe.

This has led to speculation that Circle’s USDC could capture significant stablecoin market share in jurisdictions with regulatory certainty, leaving USDT as the stablecoin of choice in markets with less-defined regulations.

The next MiCA phase

A whole host of other service providers, such as those offering investment advice, portfolio management, orders execution, custody and administration of crypto assets on behalf of clients, and the operation of a crypto-assets trading platform, are set to come under the MiCA umbrella by the end of this year.

This entails compliance with Know Your Customer (KYC) obligations, transparent reporting, plans for an orderly wind-down, an obligation to report market abuse, transparency on fee structures and the requirement to segregate client assets from their own assets.

In some cases, companies will need a license to operate in the EU and the cost of regulatory compliance is expected to hit smaller enterprises the hardest. However, the events of 2022, including the collapse of the FTX exchange, provided a hard lesson about the need for enhanced regulation and security guarantees.

The likely future impact

There is little doubt that companies will find it hard, if not impossible, to offer many crypto assets services in the EU in future without a license or having done their regulatory homework.

MiCA is likely to have a profound effect on the corporate digital assets landscape. The winners are those who have seen the writing on the wall and geared themselves up for compliance at an early stage. This includes enterprises that predicted the likely impact on stablecoins and currently favour USDC over USDT for their operations. Other companies that prefer the laissez faire regulatory regime of some offshore jurisdictions may be forced to turn their backs on Europe.

Smaller firms that lack the financial means or appetite to comply with regulators may have to change their business models or stick to the decentralised financial markets that fall outside the scope of MiCA.

Institutional investors will now be able to take advantage of the opportunities offered by crypto assets with greater certainty and the same transparency as offered by TradFi. The crypto market as a whole is now set to blossom with the arrival of institutional investors, who will prefer regulation-compliant service providers to gain exposure to crypto assets.

MiCA has now set a regulatory benchmark that will attract the attention of other jurisdictions, but the main market that has yet to fully define its regulatory intentions towards crypto assets is the biggest financial centre – the U.S.

It is to be hoped that U.S. regulations will become clearer following the presidential election in November and the establishment of a new government early next year. Once the political dust settles, the world’s largest financial market can play catch-up with the EU and APAC to achieve regulatory certainty.

ENDS

***What is MiCA?***

Classification: MiCA breaks crypto assets into three categories: e-money tokens which are stablecoins pegged to a single fiat currency; asset-referenced tokens, including stablecoins backed by one or more other assets, such as gold; utility tokens that typically provide on-chain access to goods or services. NFTs are only covered by MiCA if they are considered utility tokens or financial instruments. Algorithmic stablecoins, whose value is set by code, are not covered by MiCA.

Token issuers are required to have a legal entity in the EU and to produce a Whitepaper prospectus outlining the characteristics of the token and risks to investors.

Crypto-Asset Service Providers (CASPs) are individuals or entities that provide crypto asset services such as custody, trading, asset management, issuing credit, transferring assets or offering professional advice. They are required to have a license to operate in the EU (which covers all member states) and to comply with anti-money laundering and marketing rules while acting in an honest, professional manner and having a transparent fee structure. They must also have clear plans to keep client assets segregated and secure in the event of insolvency.

Decentralised Finance services that operate without intermediaries do not come under the scope of MiCA. However, defining full decentralisation across the whole value chain still presents a legal challenge.

Disclaimer: The information in this publication pertaining to Sygnum Bank AG (“Sygnum”) is for general information purposes only, as per date of publication, and should not be considered exhaustive. This publication does not consider the financial situation of any natural or legal person, nor does it provide any tax, legal or investment advice. This publication does not constitute any advice or recommendation, an offer or invitation by or on behalf of Sygnum to purchase or sell any assets. No elements of precontractual or contractual relationship are intended. While the information is believed to be from accurate and reliable sources, Sygnum makes no representation or warranties, expressed or implied, as to the accuracy of the information. Sygnum expressly disclaims any and all liability that may be based on such information, omissions, or errors thereof. Any statements contained in this publication attributed to a third party represent Sygnum‘s interpretation of the data, information and/or opinions provided by that third party either publicly or through a subscription service, and such use and interpretation have not been reviewed by the third party. Sygnum reserves the right to amend or replace the information, in part or entirely, at any time, and without any obligation to notify the recipient of such amendment / replacement or to provide the recipient with access to the information. Simultaneously, there is no obligation of Sygnum to inform recipients of information, if before provided information later becomes outdated, inaccurate or obsolete, unless otherwise provided by applicable law. The information provided is not intended for use by or distributed to any individual or legal entity in any jurisdiction or country where such distribution, publication or use would be contrary to the law or regulatory provisions or in which Sygnum does not hold the necessary registration, approval authorisation or license. Except as otherwise provided by Sygnum, it is not allowed to modify, copy, distribute or reproduce, display, license, or otherwise use any content for commercial purposes.

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