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Crypto-assets are one of the major distributed ledger (DLT) applications. But as the crypto market continues to grow, the regulatory framework is struggling to keep up with it. That poses a true challenge to crypto companies, who face different rules in every market they enter. After all, inconsistent crypto legislation is more than a technical issue - it's a security threat, too. But, as recent initiatives show, big changes are underway.
Earlier this summer, EU lawmakers finally agreed on a provisional version of the Markets in Crypto Assets (MiCA) framework. Once it comes into force, MiCA will be the most important piece of crypto regulation the EU has seen.
Here are some of the key takeaways ZealiD sees in the upcoming regulation:
Much like the payment services directive, MiCA treats crypto services as financial services. Posing that against how many countries define them today, that's a big move. It leaves little room for EU member states who still neglect regulating the crypto market.
Given the demise of leading stable coins in the US, one thing is clear: the crypto market is very volatile. Although the crypto community may have negative feelings about MiCA, it's here to protect everyone involved. It will also set a clear structure to the crypto market via an official actor nomenclature. The current version of MiCA defines roles like “issuer” and “Crypto asset service providers” and “E-money token provider”.
Much like the second payment services directive, MiCA will create a level playing field for hundreds of players in the market. That means better conditions for international growth and more space for innovation. It will also promote financial stability by protecting consumers and investors.
MiCA forces member states to regulate the crypto market in line with this regulation. The governance package covers a broad area, including significant asset-backed “stable coins” and E-money type tokens.
ZealiD found some key themes:
→ The rise of white paper as a key requirement and governance tool - a reminder of the busy “initial coin offering” era a few years ago.
→ The national competent authority (“NCA”) has the power to suspend or prohibit a public offer of crypto-assets. It also suspends the admission of such crypto-assets to trading (including warning mechanisms to issuers).
→ Asset referenced token issuers need a legal office in the EU and also these high impact tokens need authorization by the NCA.
→ The rise of risk management and control requirements. These involve information security management systems, anti-money laundering measures, business continuity and termination plans, and so on.
→Focus on preventing stable coin meltdowns (like in the US). Some measures to achieve that are reserve of assets, capital requirements and independent custody mechanisms (including redemption rights).
→ E-money tokens, much like asset referenced tokens, require licensing and authorization.
→ A new measure is that holders will have a claim on issuers (of both asset-referenced and e-money tokens.
EU member states want to maintain confidence in financial markets, instruments and currencies. Protecting consumers and investors is a major part of this plan.
The key tool for implementing a consistent regulation throughout the EU is white paper. But it's not the paper itself that provides consumer protection. What matters most is the relationship between the white paper and the regulator. Besides transparency, there are other forms of commitment that can be audited and used as the basis for legal action. These include, but are not limited to:
→ Clarity on legal and natural persons behind the issuer
→ Public offer
→Admission to training
→ Evaluation of underlying risks
In line with general share offerings, the MiCA also proposes a consumer right of withdrawal and protection. It would allow competent authorities to suspend or prohibit a public offer of crypto assets. They could also suspend or prohibit the admission of such crypto-assets to trading on a trading platform (in cases where it doesn't follow the relevant requirements).
MiCA shows a strong focus on information related to the owners and officers of crypto companies. It aims to prevent conflicts of interest and money laundering (and terrorism). Another goal is to ensure ownership rights, custody and liability for ICT related incidents. On liability, MiCA states that civil liability rules should apply to crypto asset issuers and their management body.
Such operational requirements encourage honest, fair and professional play in the industry. But as a qualified trust service provider, ZealiD sees them as quite qualified ones. To avoid ICT related incidents, companies must run healthy information security management systems. In turn, that requires sizable organisation and know-how beyond crypto businesses.
Not an ideal environment for startups, is it?
With MiCA, the bottom line is that issuers and crypto service providers have to put transparency first. And that extends to all other financial services, users of issuer tokens and crypto services. KYC is a key factor here, but it's also the biggest challenge ahead. The issue is that early adopters prefer anonimity, and MiCA requirements go against it.
By comparing crypto to other financial services, MiCA highlights the importance of e-money and credit institution authorizations. These two aspects are bound to become a key priority for crypto service providers.
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