The first wave of the European Union’s groundbreaking, comprehensive legislation on digital assets comes into effect on Sunday. With the Markets in Crypto-Asset Regulation framework, Europe has managed to do what other jurisdictions, including the US, are still avoiding: providing legal and regulatory clarity for not just one part of the digital asset market, but for everything.
Catalysed by the spectre of Big Tech, such as Meta’s Diem (formerly Libra) initiative, entering financial markets, or fears of unregulated cryptocurrency, the past five years have been marked by concerted policy development in Europe. MiCA will have a profound effect on permanently bridging digital assets and the real economy, and in a typically European way.
Dante Disparte is Chief Strategy Officer and Head of Global Policy at Circle.
The opinions expressed in this column are those of the author and do not necessarily reflect those of CoinDesk, Inc. or its owners and affiliates.
In the first decade of crypto, much of the industry was marked by a dazzling and recurring boom-bust cycle that made this, in many ways, a uniquely American market. As a result, not only is the US dollar the price benchmark for digital assets (thanks to the steady rise of stablecoins, which now exceed $150 billion), but also the reserve currency of internet finance, to the extent that it plays that role in the real world. MiCA aims to address this by giving euro-denominated stablecoins, which will be classified as e-money tokens under the new EU rules, a chance to succeed and create a consumer market of 441 million people.
While some aspects of MiCA are protectionist in nature, anchored in protecting European consumers and investors from the fraud and risks that plague fast-moving crypto markets, there is also a degree of economic and technological sovereignty at play. This is most evident in how offshore stablecoins – diplomatically referred to as global stablecoins – are not permitted under MiCA. Stablecoins that are pegged to other currencies must primarily comply with e-money licensing requirements in Europe, which means adhering to prudential, financial crime compliance, and other regulations. If the stablecoin issuer offers other crypto asset services, it must obtain a second license – either as a Digital Asset Service Provider (DASP), Virtual Asset Service Provider (VASP), or Crypto Asset Service Provider (CASP), depending on the jurisdiction. This requirement is a baseline level of compliance for the custody of digital assets. Beyond these licensing requirements, the days of amorphous crypto companies without a substantial presence in the EU are over.
Indeed, MiCA is as much about job development and economic competitiveness as it is about consumer and market protection. Licensed entities must have responsible mind and management in an EU jurisdiction, which then allows them to move their activities across the federation thanks to pan-European regulatory harmonization – although there is still a long way to go for national regulators to ensure to ensure that MiCA enters into force smoothly in the common market.
For the crypto industry and its existential link with the banking sector, MiCA marks a profound change that only the most serious players are ready for. For example, in the resurgent stablecoin category, where the dollar is the benchmark currency, MiCA marks a proverbial fiscal cliff where unregulated or non-compliant tokens are eventually delisted or have their access severely restricted by crypto exchanges. The reason is simple. Rather than treating stablecoins as a fringe financial product or just a poker chip in a crypto casino, MiCA brings stablecoins in line with long-standing electronic money regulations. Therefore, all stablecoins offered by EU crypto exchanges must comply with e-money token regulations. This gives the token holder a right to exchange at par for the underlying currency directly from the issuer, a way to strengthen collective accountability and consumer protection across the interconnected digital asset value chain – from the wallet, to the exchange and ultimately to the issuer . Compare this model with the amorphous standards or the lack of prudential protection against the run on the stable-in-name-only coin Terra Luna. If Terra Luna had complied with the US e-money equivalent, which is state money transmission laws, consumers could have been better protected from the crash.
Under the prevailing EU model, all regulated stablecoins will now have a common regulatory floor, which will not only boost competition but ultimately lead to broader fungibility and interoperability in the EU market. Like all new rules or comprehensive regulations, MiCA is imperfect and in some places overly prescriptive, so much so that EU policymakers are already thinking about MiCA 2.0, which could potentially fill certain gaps in the regime, such as non-fungible tokens (NFTs), decentralized finance and other areas. While MiCA has now given European crypto market participants clear rules, imperfect rules or a lack of federal regulation on the US side of the Atlantic have allowed an industry to flourish. Should a transatlantic technology divide widen – or should the US and critical EU partners pursue shared digital commons?
If US policymakers take a competitive stance with the EU in digital assets, a true “NAFTA for digital assets” could be envisioned across North America. A lasting alternative, however, would be to form a transcontinental Western digital asset alliance that would embed shared democratic values in these emerging markets and how exponential technologies are shaping the future.
Now that the world has MiCA, it is time for the US to act and reclaim its position as the global leader in financial services regulation and innovation.