Markets in Crypto Assets (MiCa) EU Regulation Explained simply

As we get closer to MiCa coming into effect, it is now more important than ever to make ourselves familiar with this piece of European regulation. MiCa aims to be the first unified regulation for the whole EU and is set to bring some rules into the wild west crypto landscape. 

MiCa can be thought of as a set of rules made by the European Union (EU) to keep things orderly in the world of cryptocurrencies. It defines crypto assets in the eyes of the law and sets guidelines for how cryptocurrencies can be created, bought, sold, and used in the EU. Its main purpose is to make sure that everyone plays fair, businesses can grow, and people who invest in cryptocurrencies are kept safe.

In this article, we will focus on what exactly this regulation means for you and your assets, whether you are an individual investor or running a business. We will also touch on some wider implications of how MiCa could impact the overall crypto market and evaluate what it does and doesn't do correctly.

What MiCa Talks About

The Markets in Crypto Assets (MiCa) regulation offers a unified approach to the world of crypto-assets. It provides definitive rules and descriptions that cover a broad spectrum of activities in the crypto sector, including issuance, trading, and related services. The rules put forth by MiCa aim to bring some clarity and certainty to crypto-asset issuers, service providers, and investors alike. But how does it accomplish this? Let's delve into the specifics.

Defining Crypto Market and Assets

A big part of the regulation is defining what exactly cryptocurrencies or “crypto assets” are. We all know intuitively what crypto is, but the government and institutions cannot work with our loose definitions, so they had to come up with and agree upon some specific descriptions.

The general definition of crypto assets according to the EU is “A digital representation of value or rights which may be transferred and stored electronically, using distributed ledger technology or similar technology.”

Here is how the EU describes different kinds of crypto assets:

1. Electronic Money Tokens (EMTs) - a type of token that seeks to maintain a stable value by tracking the price of one specific state currency (fiat).
2. Asset-referenced Tokens (ARTs) - similarly to EMTs, ARTs also maintain stable value, but in this case by referencing a wider area of assets, which may include other crypto assets, transfer rights, multiple fiat currencies, and so on. You may think of them as stablecoins backed by multiple types of assets.
3. Other than EMTs and ARTs - in this category would fall tokens that are issued and accepted by the same entity. For example, utility tokens, which can be exchanged for goods and services.

Obligations for Investors and Businesses

So far, businesses that provided crypto-related services were regulated loosely based on the specific country they operate in. There are some common rules that all crypto service providers have to comply with, like the notoriously known KYC (Know Your Customer) and AML (Anti Money Laundering).

To top off these basic regulations MiCa is set to introduce a variety of new and complex rules that all crypto service providers will have to follow. If you run a crypto-related business, chances are that you will get classified as one or both of the following entities:

• Crypto Asset Service Providers (CASPs) - some of the entities providing third-party services which include crypto assets in some way will be classified as CASPs. Every CASP will need to get licensed in one of the EU member states and provide transparent and verifiable information about the nature of their business.
• Crypto Asset Issuers - when issuing a new crypto asset the entity will need to have an appropriate license to do so. A formal White paper will also be mandatory to describe the properties of the newly issued asset.

At this time there is little information on how this will affect individual investors, but we can suspect that no big changes will arise. Most likely exchanging fiat for crypto and vice versa will be a highly controlled process containing all kinds of security checks. Apart from that, smaller investors and users will enjoy increased security from the services they use.

What MiCa does not Talk About

Preparing a regulation as complex as MiCa naturally takes a long time and as a result of the process regulators often lag behind the industry pace. Many new assets and services have emerged while MiCa was still in the making and thus they will remain unregulated until MiCa gets updated. Of course in the time that it takes to upgrade the regulation, new types of products will already be on the market, marking an infinite race between regulation and innovation.

Web3 - DeFi, NFTs, and Other Fun Stuff

Of the assets not covered by MiCa many find their use-case in the recently emerging Web3 and DeFi space. Countless new assets and services with previously untested functions are developed every day, making it nearly impossible to categorize or regulate them.

As an example of what will not be covered by MiCa we can state NFTs, LP tokens, reward tokens, staking derivatives, lending derivatives, and so on.

How and Why MiCa came to be?

During the last few years of the rapidly developing crypto ecosystem, it became apparent to the governing institutions of Europe that some kind of regulation is needed. The primary goal in mind was to create a more systematic and secure environment for investors and businesses operating in the field. Enter MiCa, the European Union's response to this ever-evolving scenario.

MiCa's story began on 24th September 2020 when the European Commission (EC) first proposed a draft of this regulation. The EC envisioned MiCa as a cornerstone of its digital finance strategy, a plan designed to assess the growth of digital finance while curbing its associated risks. 

The European Parliament and the EU Council adopted a compromise text on the Regulation in December 2021, and the proposal got the green light from the European Parliament on 20th April 2023. Reactions to MiCa were initially mixed, as many individuals and businesses felt that the presence of regulation would slow the development of the ecosystem and make the industry difficult to operate in. Nonetheless, it is expected for MiCa to come into force between mid-2024 and early 2025.

How Could MiCa Influence the Crypto Market? 

Generally in the decentralized and privacy-focused world, regulation of any kind is something that most users try to stay away from. Of course in the current European society, this kind of approach is highly unlikely, as we tend to regulate pretty much everything.

A bigger regulation of this kind has been scaring crypto markets for quite some time now and it seems the day has finally come. After MiCa comes into force we could expect a decreased rate of innovation as it will be very expensive and complicated for small independent businesses to enter the field. This may benefit the already established companies which have more capital and legal expertise at their disposal. 

A clarified legal framework may also cause some previously non-crypto companies to start investigating the space and cause an increased rate of adoption, albeit for the price of increased centralization. 

Future Outlook

We have gone through what changes is MiCa (Markets in Crypto Assets) going to bring into the market for individuals and service providers. MiCa will be the first attempt worldwide to create some kind of unified regulation and therefore we cannot tell with absolute certainty what will happen when it comes into force.

What we know from other industries is that regulations usually benefit two groups: common users and big corporations, but on the other hand hold back innovation by imposing unnecessary restrictions on smaller businesses. It is a tradeoff between security and innovation. 

As mentioned above in the near future we could most probably expect:

• A slower rate of innovation by penalizing small projects.
• Increased rate of adoption as corporations enter the field and potentially increase in the price of certain assets.
• Further development of decentralized projects that operate off-grid.