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EU lawmakers have approved the Markets in Crypto-Assets (MiCA) regulation, marking the first attempt by government to regulate cryptocurrency on such a large scale.

Yesterday (20 April), the European Parliament voted overwhelmingly in support of a new law, with 517 members in favour, 38 against, and 18 abstentions.

Last year in June, the two legislative bodies of the EU, namely the Council of the European Union and the European Parliament, already reached provisional agreements on the rules.

What does MiCA cover?

MiCA will establish the EU’s first set of rules for the crypto industry, creating a harmonised framework for crypto service providers across the bloc.

The law aims to ensure that crypto transfers, like any other financial operation, can always be traced, and suspicious transactions blocked.

It will also require exchanges to keep separate their funds from clients’ funds, and prohibit insider trading.

Additionally, stablecoins will be required to maintain ample reserves to meet redemption requests in the event of mass withdrawals. Stablecoins that become too large face being limited to €200m in transactions per day.

MiCA will mandate that any firm providing cryptocurrency services within the EU must obtain registration in an EU member state, which will grant them permission to operate throughout the entire bloc.

The responsibility of ensuring compliance with regulations will fall under the supervision of the European Banking Authority and the European Securities and Markets Authority.

When does it take effect?

The legislation is expected to come into force by July, with regulations regarding stablecoins scheduled to take effect from July 2024.

The broader regulation of crypto-asset service providers and the expectation for them to meet the Travel Rule will be enforced from January 2025.

In a tweet, Changpeng Zhao, CEO of the world’s largest crypto exchange Binance, said his company was “ready to make adjustments to our business over the next 12-18 months to be in a position of full compliance.”

Calls for MiCA 2

Despite the groundbreaking nature of the legislation, some regulatory hurdles have not been tackled, including crypto lending, decentralised finance, and non-fungible tokens (NFTs).

This has led to calls for a MiCA 2 from prominent figures such as European Central Bank head Christine Lagarde.

Sector experts believe that MiCA can help bring more credibility and stability to the crypto industry, benefiting both virtual asset providers and traditional financial institutions.

Compared to most registration regimes, MiCA requires detailed disclosures and operates as a prudential licence.

This level of transparency is expected to give traditional banks and insurance companies, which are thus far reluctant to work with crypto firms, more confidence to do so.

A model to follow

MiCA is expected to be a model for other jurisdictions, including the UK and the US, in implementing similar legislation.

Bob Reid, CEO and co-founder of Everest, which is licensed by the Malta Financial Services Authority (MFSA) as a virtual financial asset service provider, commented on LinkedIn.

“I’m glad Everest invested four years into being licensed and regulated in the EU, essentially paving the way for us to be grandfathered into a MiCA licence,” he said.

“Combined with the EU’s AML requirements and designations of DeFi, NFT marketplaces and DAOs, it’s clear that identity verification, reporting, monitoring will be the norm – and will bring about a mass market adoption. The US and others should use MiCA as guidelines,” he added.

Malta was one of the first countries to set up a regulatory framework for virtual assets in 2018.

Mairead McGuinness, commissioner for financial services in Europe, described the regulations as a “world-first”.

“We are putting safeguards in place that would prevent companies active on the EU market from engaging in some of the practices that led certain crypto-asset operators to collapse,” she said during the parliamentary debate.

“As we have seen in recent months, stringent rules and supervision are very much needed,” she added.

Last year (2022) was labelled the year of crypto bankruptcies, starting with the collapse of sister cryptocurrencies Luna and UST in May after UST lost its peg to the dollar, causing significant losses for investors.

This triggered a liquidity crunch across the sector that ultimately led to bankruptcies for crypto lenders Celsius Network and Voyager Digital.

The most notable collapse was the bankruptcy of Sam Bankman-Fried’s crypto exchange FTX at the end of last year.

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