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The EU's long-awaited Markets in Crypto Assets regulation has been welcomed across the financial services industry. James King reports.

The EU has staked its claim to global regulatory leadership of cryptocurrencies and other digital assets, following a provisional agreement on the Markets in Crypto Assets (MiCA) regulation on June 30, 2022. Negotiated between the European Council presidency and European Parliament, MiCA introduces new regulatory requirements for crypto-assets, and their issuers and service providers (CASPs), among other important changes. Though the agreement’s full text is yet to be published, MiCA has been welcomed for bringing regulatory clarity to the European market, while helping to bridge the gap between traditional and decentralised finance.

In a nod to MiCA’s significance, Bruno Le Maire, France’s minister for the economy, finance and industrial and digital sovereignty, noted the benefits the regulation could bring in terms of enhancing consumer protection, preventing the misuse of crypto-assets and putting an end to the “crypto Wild West”. Indeed, Europe’s standard-setting regulatory approach has earned praise from a wide spectrum of market participants. “Europe is taking a leading role in trying to regulate this area, so it’s a really positive development,” says Ian Waterworth, director, technology and operations at the Association for Financial Markets in Europe (AFME).

Taming the market

In taming this market, MiCA will oblige CASPs — which includes exchanges and wallet providers — to seek authorisation to operate in the EU. Nationally, competent authorities will, for the most part, be responsible for their oversight and will therefore enforce MiCA requirements. Yet, CASPs with more than 15 million active users will be designated as “significant CASPs” and subject to additional intervention powers by the European Securities and Markets Authority (ESMA) in the event of any threat to financial or market stability or investor protections.

Further, MiCA makes clear that custodial liability will apply to CASPs offering custody services, such as wallets, or cryptocurrency exchanges holding assets for their clients. This will apply in the event of any losses experienced as a result of a cyber attack, or through any shortcomings stemming from operational failures, among other examples. This makes a major step forward in terms of increasing the protections around investments in digital assets across the EU. “There are a number of things that AFME have been working on, not least of which is custodial liability,” says Mr Waterworth. “And we see some positive developments around how MiCA would apportion responsibility for custodians of digital assets.”

Encouragingly, MiCA extends its regulatory reach into the realm of climate and the environment. CASPs, for instance, will be required to reveal the blockchain consensus mechanism they use, such as proof of work or proof of stake, as part of this obligation. More generally, all entities in the wider crypto-asset sector will be required to outline the environmental and climate-linked impacts of their operations. ESMA is expected to create draft technical regulatory standards linked to these requirements.

With respect to non-fungible tokens (NFTs) and decentralised autonomous organisations (DAOs), MiCA will apply the principle of same risk, same regulation. In this sense, DAOs that are truly decentralised and NFTs that do not have a financial instrument function will fall outside of MiCA’s regulatory scope. Yet, where DAOs conduct financial activities, or in cases where NFTs adopt the characteristics of a financial instrument, they will be regulated according to MiCA guidelines.

Pragmatic approach

“We are pleased with the pragmatic approach to both DAOs and NFTs in MiCA. There will be a decentralised finance and NFT review in approximately 18 months, so there’s going to be a lot more work done around this,” says Elise Soucie, associate director of technology and operations at AFME.

The broader implications of MiCA, which is expected to be enacted in 2024, are profound. Above all, however, it is likely to engender regulatory clarity and harmonisation across the EU, which, in turn, will facilitate the involvement of a wider range of players in the market. Against a backdrop of cryptocurrency market turmoil, MiCA stands as a milestone in the ongoing maturation of the digital asset landscape.

“It’s not just about the CASPs and crypto native firms. MiCA is important for traditional financial services providers as well because it provides clarity in terms of the ways in which banks, for example, can interact with the crypto market,” says Ms Soucie.

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