The European Commission has presented the so-called MiCA regulation. As a result, this creates a far-reaching and harmonized regulation on the European level for crypto assets, including many related services. What can be potentially challenging for startups also contains enormous opportunities in terms of professionalization and growth for the entire crypto ecosystem. — Authors: Philipp Sandner, Johannes Blassl
In September 2020, the European Commission presented a draft for a comprehensive regulation of “crypto assets” (digital, blockchain-based assets), which is expected to come into force at the end of 2022. The regulation “Markets in Crypto-assets” (“MiCA”), which is directly applicable in all Member States, describes the most extensive regulation of digital assets to date.
Various crypto assets: From Bitcoin over Libra to the blockchain-based Euro
Crypto assets such as Bitcoin and Ethereum are just as much in the focus of the new regulation as Facebook’s project Libra and the “utility tokens” that have gained awareness through initial coin offerings (ICOs). Bitcoin was the first crypto asset and still remains the most important up until today. Further crypto assets have been launched and the sector continues to expand. Also, numerous “utility tokens” were created through ICOs. A utility token can be considered as a means of exchange or operating resource, which provides certain functionalities, voting rights or access rights.
With so-called “stablecoins”, another important category of crypto assets has been created during the last years: For example, Tether, a stablecoin linked to the US dollar, exceeded PayPal based on daily transaction volume, for the first time in July 2020. Stablecoins are crypto assets that are supposed to provide a high degree of price stability. Their issuers intend stablecoins to be used as a means of payment. The Libra project initiated by Facebook also falls into this category.
The MiCA regulation attempts to capture this entire spectrum of crypto assets and provides differentiated and detailed rules, which are in no way inferior to the existing complex financial market regulation. Figure 1 provides a high-level overview of the various types of crypto assets the MiCA regulation includes.
It can be assumed that Libra back in 2019 provided the trigger to accelerate and systematize regulation. And yet it is remarkable that the sector of crypto assets, which is still of little importance when compared to other asset classes in total, is to be regulated in such a comprehensive and detailed manner.
A possible scenario for the European Commission could be that a rapidly growing crypto sector is expected in the coming years. If so, it should be comprehensively regulated at an early stage. For one of the largest economic areas in the world, the MiCA regulation seeks to constitute substantial investor protection for the entire crypto sector.
Prevention of a regulatory patchwork for crypto assets through individual national rules
With this new regulation, the EU Commission also aims to halt the legal fragmentation already happening in several of the EU Member States. In some cases, Member States have already issued national regulations for crypto assets. For some time now, a few EU states have started to introduce “nationally tailored” regulations with regard to services involving crypto assets. In other EU countries, however, service providers related to crypto assets are still completely unregulated.
For example in Germany, custody and management of crypto assets or private cryptographic keys used to keep, store or transfer crypto assets became a financial service requiring financial market authorization at the beginning of this year. Therefore, as the temporary custody of third-party crypto values is relevant in many blockchain-related business models, many crypto-asset-related business models in Germany require a BaFin license since the beginning of this year.