The impending implementation of the EU’s Markets in Crypto Assets (MiCA) regulation has garnered significant attention recently. This regulation is poised to have a profound impact on the cryptocurrency industry, particularly on the stablecoin market.
MiCA mandates that stablecoins backed by fiat currency must maintain sufficient liquidity reserves and obtain an “electronic money license.” Additionally, it sets limits on the trading volume of stablecoins and outlines other asset support requirements. June 30 marks a critical deadline, requiring exchanges to delist stablecoins that do not comply with these standards.
In response to the MiCA regulation, major cryptocurrency exchanges in the EU are taking proactive measures. This week, Bitstamp announced it will delist stablecoins that fail to meet MiCA requirements, such as Tether’s EURT, and has communicated directly with affected customers.
Binance has also restricted users from using unauthorized stablecoins and copy trading services, advising users to convert to compliant digital assets or fiat currency. In contrast, Coinbase has yet to take explicit preventive measures but stated it will continue to monitor the situation to ensure MiCA compliance.
The implementation of the MiCA regulation presents multiple challenges for the EU cryptocurrency market. Given that most stablecoins are pegged to the US dollar, many stablecoins may struggle to meet MiCA requirements in the short term, leading to restricted trading and reduced liquidity.
Jasper De Maere, Head of Research at Outlier Ventures, noted that the new regulation could limit trading activity and crypto investment opportunities for European citizens and compel businesses to reduce their activities in the EU, impacting industry innovation and consumer market access.
Despite the compliance challenges and market uncertainties brought about by the MiCA regulation, it also provides legal clarity and investor protection. Looking ahead, as more exchanges and stablecoin issuers adjust their strategies to comply with MiCA requirements, the EU cryptocurrency market is expected to continue developing within this new regulatory framework.
Industry experts believe that MiCA has a positive role in providing legal clarity and protecting investors, potentially setting a benchmark for international crypto regulation.
Potential Impacts of the MiCA Regulation
1: Delisting of Privacy Coins
Cryptographic assets with built-in anonymity features (such as Monero, Zcash, etc. “privacy coins”) will only be allowed on trading platforms if the CASP (Crypto Asset Service Provider) or relevant regulatory authorities can identify token holders and their transaction histories.
Since this is practically unfeasible, it is expected that EU-regulated cryptocurrency exchanges will delist privacy coins from their offerings.
2: Easier Licensing for CASPs with Existing European Licenses
CASPs that have already obtained licenses under national frameworks will benefit from a streamlined MiCA authorization process and have up to 18 months to obtain the final MiCA license. For example, regulated crypto custodians in Germany may benefit from these simplified procedures and transitional measures.
However, only CASPs with MiCA licenses will have the opportunity to offer services across the entire EU single market through so-called cross-border licensing. This is why it is anticipated that most crypto businesses will apply for MiCA authorization as soon as possible.
3: A Unified European Market
The MiCA regulation will bring about unified regulation, enhancing competitiveness and promoting institutional development. Until now, EU crypto companies wanting to serve the entire EU market had to apply to each country’s regulatory authority, resulting in high costs and complexity.
Under MiCA, the same binding EU requirements will apply to all 27 member states. Once a company obtains a MiCA license in one country, it will be able to offer licensed services across the entire EU single market through “cross-border licensing.”
4: Limiting Offshore Companies, Benefiting EU Enterprises
After MiCA takes effect, offshore, unregulated companies will not be able to actively attract EU customers. Even the rules allowing foreign enterprises to accept customers when EU users actively contact them will become stricter.
This means that MiCA-regulated crypto enterprises will capture more EU market share from these unregulated offshore competitors.
5: Promoting Institutional Participation, Accelerating European Banks’ Deployment
MiCA may lead to increased institutional adoption and activity in the EU crypto market. According to Bloomberg data, only 4% of European institutional funds are exposed to crypto assets. Regulatory uncertainty is a major concern preventing institutions from entering this field.
It is expected that within the next 48 months, major European banks will launch crypto asset services, whether it be custody, trading, or the issuance of e-money tokens or asset-referenced tokens.
6: Impact on Stablecoin Issuers
MiCA’s new regulatory rules will pose significant compliance challenges for stablecoin issuers like Tether, especially considering Tether’s ongoing lack of full disclosure of its reserve conditions and composition, as well as the absence of comprehensive audits by authoritative independent agencies.
Tether has also been involved in multiple lawsuits and investigations, including a $18.5 million settlement with the New York State Attorney General’s Office and rumored investigations by the US Department of Justice for alleged bank fraud, money laundering, and illegal operations. Moving forward, stablecoin issuers like Tether will face substantial compliance reform costs.
To address these challenges, Tether should actively advance its compliance processes and establish good cooperative relationships with EU regulators and third-party audit agencies to enhance its market credibility and competitiveness.
In response to increasingly stringent regulatory requirements, Tether has taken measures to advance its compliance process. For example, Tether recently announced a partnership with the Italian branch of BDO International, the world’s fifth-largest accounting firm, which will be responsible for auditing the company’s reserve assurances and proof reports. They also plan to increase the frequency of audit report releases from quarterly to monthly.
Under the MiCA framework, stablecoin issuance will become more compliant and transparent. Stablecoin issuers like Tether need to expedite their compliance processes to adapt to the new regulatory environment and maintain competitiveness in the EU market.
7: MiCA’s Impact on DeFi
MiCA applies to enterprises—both natural and legal persons—as well as “certain other entities.” These “other entities” might include entities not established by law, but the EU has clarified that decentralized DAOs and protocols are not the newly targeted subjects this time.
MiCA Paragraph 22 clarifies, “If crypto asset services are provided in a fully decentralized manner without any intermediaries, they should not fall within the scope of this regulation.” This core statement has been supported by multiple public statements from key officials of the European Commission and Parliament.
However, the devil is in the details. The bill proposes that even if some activities or services are performed in a decentralized manner, MiCA might still apply. This means that if certain parts or segments of a DeFi project are not fully decentralized, they may still need to comply with MiCA’s relevant provisions.
To what extent decentralization (technical, governance, legal, etc.) is required to be out of scope is a subjective judgment. I anticipate that some enforcement and litigation cases will revolve around this issue.
The EU is generally reluctant to enforce their laws in other countries, but if some DeFi projects nominally claim decentralization but are actually centralized and operate in the European region or provide services to EU users, the EU will pay special attention.
DeFi projects have two choices to stay out of scope:
- Prove complete decentralization (a high threshold)
- Block EU users
However, it is commendable that the EU excluded truly decentralized DeFi projects when drafting regulations for traditional financial companies. If some aspects of MiCA could become global standards, it would be good news.
8: Challenges and Uncertainties
However, MiCA’s actual success heavily relies on the implementation standards and enforcement practices set by EU regulators over the next 12-18 months.
Some provisions may impose burdens on industry participants, with their full impact only becoming apparent after the technical implementation standards provide practical operational guidelines.
9: High Compliance Costs and Innovation Constraints
Similar to recent situations in Hong Kong, high compliance costs might lead to business flight, and MiCA’s compliance costs could similarly cause stablecoin issuers to bypass the EU. Disclosure requirements and responsibilities for exchanges may be too burdensome to benefit consumers, making their products less competitive compared to offshore competitors.
EU consumers may either be cut off from innovation or continue to use (and be exposed to) the largest pools of offshore liquidity and utility. Additionally, regulators might deem that most NFTs and DeFi projects actually fall within MiCA’s scope, requiring compliance—this remains an open door for interpretation in MiCA’s preamble. This will inevitably lead to teams and resources migrating out of the EU.
The Nine Modules of the MiCA Bill
- Definition and scope of the bill
- Transparency and disclosure requirements for cryptocurrency project issuance
- License applications and obligations
- Measures to protect investor and customer rights
- Requirements to prevent insider trading and market manipulation
- Penalties for violations
- International cooperation and coordinated regulation
- Potential impacts of the MiCA bill
- Can the MiCA bill become a global standard?
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