Last month the EU Parliament passed MiCA — the Markets in Crypto Assets Regulation. MiCA, arguably the world’s most comprehensive legal framework for “crypto-assets” requires crypto-asset service providers and issuers to take action related to governance, consumer protection and the environment and expands the entities that will be subject to the bloc’s anti-money laundering (AML) framework. Peter Kerstens of the European Commission joined TRM Talks to discuss MiCA and what it means for AML, DeFi, NFTs, stablecoins, and global regulatory frameworks for crypto. Here are some key takeaways:
Key MiCA provisions were born out of Libra and the ICO boom
To understand MiCA – and the risks it intends to address – it is important to understand its historic origins. According to Mr. Kerstens, MiCA was born out of two main issues of the day in the late teens – first the ICO boom and second, Facebook’s failed stablecoin project Libra.
One of the key components of MiCA is the requirement for market participants to publish whitepapers. The whitepaper is a detailed document that describes a new cryptocurrency or blockchain project and must include a detailed description of the cryptoasset, information about the issuer, disclosure of key risks, financial statements, planned use of funds, tokenomics, a roadmap, and potential conflicts of interest. The whitepaper, intended to provide transparency to investors, is a direct reaction to the ICO boom.
In addition, Mr. Kerstens explained that MiCA’s “marketing provisions are inspired by the very bad marketing practices which we saw in 2017, 2018 when people were promised Lamborghinis. If you buy this coin, this Lamborghini is going to be parked in front of your door in a couple of weeks time. We didn't want any of this stuff. So, the purpose was to create a disclosure regime that provided clarity of important facts but also warnings for investors.”
MiCA’s stablecoin-related provisions were inspired by Facebook’s Libra – a stablecoin backed by a basket of fiat currencies and supported by some of the world’s most important companies. While MiCA does not use the term “stablecoin,” – and instead uses “asset reference tokens” to describe fiat-backed digital assets – it requires a whitepaper and fiat reserves in order to issue a stablecoin in Europe. This focus on stablecoins is a direct result of regulatory concerns about Libra when it was launched in 2019.
MiCA might not address DeFi but Europe is thinking about it
Mr. Kerstens makes clear that MiCA intentionally does not address decentralized finance. “MiCA, like any piece of financial legislation, really focuses on intermediaries, either the issuers or cryptoasset service providers. Just like banking regulation regulates banks and securities regulation regulates securities issuers, MiCA regulates issuers and service providers in the crypto space. Now, if there is no intermediary, if there is no service provider, it is very hard, if not impossible to regulate.”
That is the challenge of regulating what Mr. Kerstens calls “genuine DeFi.” Genuine DeFi unlike “DeFi-in-name-only,” means that the project or service involves only disintermediated software rather than a service that simply presents itself as decentralized by is actually run by “ an identifiable person, entity or an intermediary. While, Mr. Kerstens argues that centralized services must comply with MiCA, genuine DeFi is different and requires a “new paradigm.” “This is really what I would call the cutting edge of regulatory innovation,” says Mr. Kerstens, who explains that he fears “solutions” in the nascent DeFi space could potentially stifle innovation. Instead, Mr. Kerstens believes that working with the private sector, Europe can come up with new ideas that mitigate risk and encourage innovation as policy makers study the issue over the next 18-months.
Europe’s anti-money laundering package will complement MiCA
While MiCA does not address anti-money laundering, a separate AML package – consider it a companion to MiCA – is also making its way through the European Parliament. The idea is that anti-money laundering legislation should work “horizontally” and in coordination with financial regulations. In other words, anti money laundering rules apply across securities, commodities, banking and other financial regulation including, now, MiCA.
The AML package, which is currently making its way through the EU Parliament, extends AML rules to all CASPs and extends the Transfer of Funds Regulation – aka “the travel rule” – to crypto businesses meaning that all crypto transactions in the bloc will need to carry identifying data with no minimum transaction threshold. The TFR seeks to bring Europe in line with FATF standards.
The EU is leaning into its business advantage and the world will follow
The goal of MiCA “is we wanted to onshore crypto activity in the EU and ensure that crypto activity takes place in the sunlight,” explained Mr. Kerstens. While this does not mean that the bloc plans to encourage cryptocurrency investment, it does mean that businesses will have legal clarity in Europe when they look around the world to determine where they want to deploy investment in the sector. “The trajectory of travel is very clear and that is motivating investors to opt for the EU as opposed to some other jurisdictions where things are as clear as mud. That legal certainty is driving investment and that is something which we intended.”
And, it appears that the world is watching. According to Mr. Kerstens we are already seeing the “Brussels Effect,” – other jurisdictions copying the EU’s legislation. “There's no copyright on MiCA so people can plagiarize as much as they want. It will be published in 23 languages.” While Kerstens explained that doing a “carbon copy” won’t work because of Europe’s unique structure, there is a lot to learn after years of discussion, debate and iteration. “If they have the same conversation in Asia, Africa, South America or in the U.S. as we had in Europe, I would be surprised if they don’t end up in a similar place.”
As MiCA moves toward implementation, key questions still loom about how member state regulators will implement MiCA’s licensing regime and other key requirements. However, even as that process begins, it is clear that policy makers in Brussels are already thinking about what’s next.
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