What does MiCA mean for crypto users in Europe

What is MiCA?

Market In Crypto Assets (MiCA) is a European Union regulation that provides comprehensive guidelines for trading crypto assets and establishes procedures to ensure consumer protection within European Union member states.

The regulation was originally approved by the European Union Parliament on April 20, 2023, signed into law on May 31, 2023, and eventually came into force on June 29, 2023.

Key provisions of MiCA

Market In Crypto Assets (MiCA) Regulation contains several provisions. Some of the key provisions include:

• Scope of Crypto assets: The regulation provides a scope of Crypto assets that it covers. The Crypto assets covered by the regulation include electronic money tokens (EMT), Assets-referenced tokens (ARTs), and any other token which do not belong to the two earlier classes such as utility tokens.
  
  The regulation excludes Crypto assets that are non-transferrable, non-fungible, qualify as financial instruments or deposits, or assets issued by the banks as legal tender such as Central Bank Digital Currencies (CBDCs).
   
• Stablecoins: The regulation of crypto assets like Stablecoins is one of the major focuses of the regulation. The Crypto assets stated to be covered by the regulation are of three types two of which are stablecoins; Electronic-Money tokens and Asset-referenced tokens.
  
  Electronic-money tokens are Crypto assets that are backed by fiat currencies at a ratio of 1:1. Asset-referenced tokens are Crypto assets that seek to maintain a stable value by referencing or backing the assets to another value (Crypto assets, gold) or a right or a combination of both.
   
• Issuance and Reserve of Stablecoins: Issuers of Stablecoins (EMT and ART) must maintain a reserve of fiat currency or assets to back the token.
  
  Issuers of ARTS must fulfill a fund requirement of at least €350,000 or 2 percent of the average amount of the reserve of the assets or a quarter of the fixed overheads of the preceding year, whichever is the highest.
  
  National Competent authorities can increase this fund requirement by 20% based on the outcome of a risk assessment carried out on the Issuer.
   
• Utility token: The third category of Crypto assets regulated by the Regulation is referred to as “ Crypto Asset other than asset-backed or e-money tokens”
  
  The regulation does not define tokens that belong in this category but it provides and defines utility tokens as an example of tokens in the category. Utility tokens refer to tokens that are only intended to provide access to a good or service supplied by the Issuer of the token.
   
• Scope of Crypto Businesses: The scope of Crypto businesses that are covered by the regulation are custodial wallets, cryptocurrency exchanges, trading platforms, token issuing, crypto assets advising firms, and Crypto assets portfolio managers. This category of businesses is classified by the regulation as Crypto Asset Service Providers (CASP).
   
• Licensing Requirements for Crypto Businesses: MiCA provides certain requirements for a Crypto business to be licensed.  A primary requirement of a Crypto business to get a MiCA license is to meet the specific capital demand. The capital demands vary based on the services that will be offered and range from €50,000 to €150,000
  
  Crypto businesses must show that rigorous Know Your Customer (KYC) and Anti-Money Laundering (AML) procedures have been put in place. Crypto businesses must demonstrate that effective governance strategies and risk mechanisms have been established.
  
  Crypto businesses can only operate within the European Union after obtaining a license from the requisite National regulator of the EU member country where the business will be operating.
   
• Compliance obligations for service providers: The regulation makes provision for an array of obligations for service providers to ensure price stability and consumer protection.
  
  These obligations include establishing KYC/AML procedures, Risk management systems, and customer due diligence. The service providers are obliged to constantly monitor transactions and report suspicious transactions to the relevant bodies.  
  
  The regulation also mandates the service providers to maintain transparency and fairness in providing services and implement strong security measures to safeguard consumer assets.
   
• Rules against Insider trading and market manipulation: The Regulation prohibits forms of market abuse which include insider trading, public disclosure of insider information, and market manipulation. This is prohibited to ensure consumer protection and financial stability of Crypto assets.

Probable issues with MiCA

MiCA may be a very comprehensive regulation and the first of its kind, but it is not without some potential concerns. Some of these potential concerns are:

• Compliance costs for smaller Crypto start-ups: Crypto start-ups are usually at the forefront of driving innovation within the cryptocurrency market. The compliance cost stipulated by MiCA may hinder and discourage the participation of smaller startups, thereby potentially stifling innovation.
   
• Concerns over reduced financial privacy: MiCA provides that crypto asset providers constantly monitor and report suspicious transactions. These could significantly reduce the financial privacy of consumers.
   
• Potential regulatory gaps: MiCA lacks clarity in certain areas which could hinder effective regulation.  The third category of Crypto assets which are “Crypto assets other than E-money tokens and Asset-referenced tokens” is not defined by the regulation. 
   
• It leaves room for ambiguity as to whether every single token not provided for in the first two categories automatically falls under the third category of assets to be covered by regulation. 

Also, the regulation lacks comprehensiveness on DeFi and Non-fungible Tokens (NFTs) which are essential aspects of the cryptocurrency market.