On April 20th, 2023 the EU Parliament voted to pass the Markets in Crypto Act (MiCA) into European Union Law. 517 voted for the law and only 38 against. It deals with ‘stablecoins’, NFTs and other types of crypto assets. At the same time the European Parliament also voted 529 to 29 in favour of a separate law known as the Transfer of Funds Regulation, which requires crypto operators to identify their customers in a bid to halt money laundering. The vote only had 14 abstentions. The EU is now leading the world in crypto regulation for stable coins, NFTs and utility tokens.
Big players within the crypto space such as Coinbase and Binance have come out strongly in favour of these new EU laws. They believe regulatory clarity will protect consumers, reduce money laundering and boost retail confidence. They remain hopeful that the UK Parliament will make good on its promise to introduce a similar regulatory framework within the next year. The same cannot be said about the USA legislator where rather than debating the inception of new laws on crypto assets, the Securities and Exchange Commission (SEC) has led the way in an approach dubbed ‘regulation by enforcement’.
Recap on Markets in Crypto Act
MiCA does not cover cryptocurrencies such as Bitcoin or the thousands of other ‘altcoins’. It focuses on what is commonly known as ‘stablecoins’, ‘utility coins’ and NFTs. The recently passed EU law distinguishes between 4 different types of crypto assets they are:
- Asset-referenced tokens (ARTs). These are stablecoins that reference other assets including fiat currencies in the determination of their value. They are only referenced to these assets; they are not pegged to them. Thus, these ARTs are more stable than cryptocurrencies such as Bitcoin but they are not systemically protected from significant fluctuations in price.
- E-Money Tokens (EMTs). In contrast to asset-referenced tokens, EMTs are pegged to the value of one official currency. They are designed to remain at a 1 to 1 ratio with the fiat currency that they are pegged to.
- Other crypto assets. These include tokens issued to allow users to vote on governance matters. This is a catch-all category for crypto assets that are not covered by the first 2 categories and that are not cryptocurrency. For this type of token the MFSA (The Malta Financial Services Authority’s Financial Services Register) requires a white paper setting out the purpose of the tokens to be submitted prior to issuance.
- Non-fungible tokens (NFTs). NFTs that include digital art and other collectibles are excluded from the rules of MiCA except when issued in a large series or when split into fractional parts. When an NFT is minted in large numbers and sold then it falls under the purview of the MiCA laws.
What the Law Requires
For the crypto assets mentioned above that are not exempted, the company releasing these tokens will be required by law to maintain sufficient reserves to meet redemption requests in the event of mass withdrawals. The European Securities and Markets Authority, or ESMA, will be given powers to step in and ban or restrict crypto platforms if they are seen to not properly protect investors, or threaten market integrity or financial stability.
ARTs and EMTs, especially that become too large also face being limited to 200 million euros ($220 million) in transactions per day. This will prevent consumers from seeing their assets (that in many cases they thought were impervious to market fluctuations) from dropping drastically in value because bad news leads to panic selling and a mass exodus that can push over-leveraged crypto companies into bankruptcy.
The other main requirement of this law is that crypto companies issuing tokens covered by MiCA need to submit details about the energy consumption required to issue coins and maintain the blockchain on which these tokens reside. Essentially, crypto companies have to submit environmental impact assessments. Presumably, token issuers will fall foul of this law if their products require unusually high amounts of electricity.
Transfer of Funds Regulation
This is a separate act that passed into EU law at the same time as MiCA. The new law states that transfers between exchanges and so-called “self-hosted wallets” owned by individuals will need to be reported if the amount exceeds the 1,000-euro threshold.
Implications of the New Laws
The main thrust of the MiCA law is to bring clarity to the consumer. A token like TerraUSD that branded itself as a ‘Stablecoin’ that maintained its parity with the dollar using an advanced algorithm that controlled supply and thus value using an in-house token called Luna is not constitutionally ‘stable’. Under the MiCA law this would be not classified as either an EMT or even an ART since an ART token cannot back its dollar parity with a token from the same company. It would be immediately flagged for legal scrutiny under the new MiCA law.
Rather, a new token with a value of 1 Dollar, 1 Pound, 100 Yen, 1 Yuan etc. issued by a private company will need to breakdown how they are backed. Moreover, tokens posing as a digital version of a fiat currency will need sufficient reserves to meet any surge in demands for pay out. This is good for the consumer and good for the crypto industry as a whole as it eliminates bad faith actors who hype up a new coin then dump their assets after a large adoption, leading to a market crash.
The environmental aspect of the MiCA law is in keeping with European Union commitments to meet the Paris Climate Agreement that aims to limit global warming to 1.5 degrees above pre-industrialised levels. In practice it will mean finding ways to power servers using renewable energy. It will also push new token designs away from proof of work protocols and towards proof of stake or similar protocols.
Paving the Way for Central Banks
The biggest implication for MiCA is that it provides the regulatory framework necessary to design and issue a crypto version of the Euro. MiCA will be adopted by all EU member states. It will supersede the previous regulatory patchwork of member state laws regarding crypto. No longer will one country allow crypto tokens and another will not. Banks previously reluctant to allow their depositors to purchase on platforms such as Coinbase will now have legal clarity that will force their hand. Either they let their customers buy crypto assets using their debit cards or they will lose customers.
The bigger financial implication is for the Central Banks. When the UK Parliament passes what we suspect will be a very similar set of laws (what was the point of Brexit?) the Bank of England and the European Central Bank will be faced with the same enticing prospect of an EMT version of the Euro and an EMT version of the British Pound.
We have come a long way from the early days of Bitcoin when banks around the world recoiled in horror at crypto currencies whose raison d’etre was to offer a way of exchanging value that was peer-to-peer, that was decentralised and that was billed as an alternative to what was perceived, in many circles, as morally corrupt fiat currencies. As new generations faced the prospect of being poorer than previous generations, it was felt that the central banks sitting pretty as the middle men were benefitting financially at the cost of its depositors.
Now zoom forward from 2009 to the present day. There were protests in Europe regarding the legal adoption of MiCA. However, just as many crypto enthusiasts stayed at home. Having put significant funds into crypto assets, especially ‘stablecoins’ many of these former anarchists are keeping quiet. Maybe they shouldn’t.
Central banks already have the power to create paper money and digital money. They lend it to governments who issue bonds to ‘pay’ for the newly created money. With the recent bank closures, we can see how reserve banking is only stable if the public deems it is stable. After over a decade of very low interest rates on borrowing money, central banks have been forced to raise their interest rates to fight inflation. Unfortunately, that makes older government bonds offering just 1% returns toxic for banks, large investment companies and pension funds.
Now add to the mix the ability of central banks to print more money in the form of the Euro Crypto Token or Euro Stablecoin. How will these new tokens be backed? Print more money to print more money? Or will they set aside a portion of their depositors holdings to cover the Euro Token reserve fund? These are the types of questions that the legacy media, sadly, is very reluctant to ask. Tulips crushed Dutch financial supremacy. Could the Euro Stablecoin do the same?
Reaction from the Crypto Exchange Platforms
Crypto exchanges such as Binance, Kraken and Coinbase have fought a running battle with banks and government legislators around the world. One moment the US government is keen on crypto projects the next it is concerned. China went from having the largest bitcoin mining sector in the world to banning crypto currencies. Although MiCA is only for the Euro Zone and does not cover crypto currencies such as Bitcoin and Ether, it does set out a regulatory framework for other types of crypto assets that are essential to the exchanges.
Crypto is coming out of the grey and black economies. MiCA will prevent anonymous transactions of value using ‘stablecoins’ loved by criminals. No doubt the darknet will respond accordingly to keep the Silk Road style sites going, but for the majority of crypto users coming into the light of proper scrutiny is a good thing. The following video is an interview with Brian Armstrong, CEO of Coinbase. He praises the new law. He is hopeful the UK will shortly follow the EU. He despairs at the USA’s ad hoc approach to crypto regulation which he points out is mired by inconsistency as two different government bodies issue contradictory statements.
Brian Armstrong CEO of Coinbase
MiCA has not been without its detractors. Crypto was hailed as ‘the people’s money’ and as a way to take back control from the banks and large financial institutions. However, the mainstream has realised the significance of decentralised ledger technology. It is by far the most secure and most transparent means to exchange value on a large scale. The MiCA law and the Transfer of Funds Regulation does a lot to provide legal clarity about what a crypto token is and how it can be used. They also set out the foundations for future laws regarding crypto assets. It was sorely needed as there has been a glut of new crypto projects over the last few years, each with their own tokens.
While MiCA is an effective start in regulating private companies, the elephant in the room remains how central bank crypto tokens or ‘stablecoins’ are going to be regulated.