EU Parliament Ratifies New Framework To Regulate Crypto Space: Here’s What To Expect

The approach toward digital currencies is varied. At one end, the Salvadoran government passed a law that made Bitcoin legal tender. In contrast, China led a massive crackdown on bitcoin trading and mining at the other end. 

In-between, other countries have taken a more measured approach to the crypto phenomenon. The U.S. government recently signaled its intention to streamline and centralize the development of regulations to govern its crypto space. However, the European Union (EU) is already leagues ahead of the United States concerning crypto laws. 

The EU’s Stance on The Crypto Market

In March 2022, as part of its Digital Finance Strategy, the EU passed a slew of regulations dubbed "Markets in Crypto Assets" (MiCA) to support the development of crypto technologies and protect its users.

Interestingly, MiCA does not apply to distributed ledger technologies such as blockchain. It also does not apply to central bank digital currencies (CBDC), which are virtual currencies issued by governments and regulated by their respective central banks. Decentralized finance (DeFi) protocols are also still outside the remit of the new regulation.

In this short guide, we will look at some of the possible effects of the MiCA regulation on the crypto space when it finally becomes operational.

Stablecoins And Crypto Exchanges Will Face Increased Scrutiny

The main focus of MiCA was on crypto exchanges and stablecoins. Through MiCA, the European Central Bank (ECB) and the central banks of member nations will have the authority to limit the scope of stablecoins. The ECB can even ban them if it feels that the digital currencies threaten the smooth operation of a country's payment systems, monetary policy, and sovereignty.

If you make a stablecoin, you will also need to keep a capital fund of at least 350,000 euros or 2% of your total reserve assets, whichever is higher.

Issuers with a market cap exceeding 1 billion euros and recording at least half a million daily transactions will face additional regulatory requirements. For instance, Tether (USDT), which is currently backed by about $25 billion, will be required to hold no less than $750 million of its funds.

On the other hand, crypto exchanges will be subjected to regulations similar to traditional exchanges. The laws are meant to ensure market integrity and trading transparency.

Exchanges will now be liable for any losses incurred by their customers due to outages or hacks.

Foreign-Based Crypto Projects Might Have A Harder Time Operating In the EU

Under the new regulation, crypto-asset service providers (CASPs) domiciled outside the European Union will not be allowed to solicit EU customers or run promotions and ad services in the EU without having a legal presence in the EU.

Foreign-based CASPs who want their tokens to be traded in the EU will have to write a white paper-like their EU counterparts.

Alternatively, EU-based crypto exchanges that want to list a non-EU digital asset can take on the legal obligation as if they were the EU-based issuer for that token. Under MiCA, the crypto exchange will then be considered the EU issuer for that asset.

Small-Scale Projects May Be Locked Out Of the European Market

One of the more attractive aspects of the crypto space is its relatively low entry barrier compared to traditional investment markets. It is easier for ordinary people to invest in initial coin offerings (ICOs) than an initial public offering (IPO). An IPO's accredited investor standards make it more attuned to deep-pocketed investors.

The crypto market was built to make it easy for small projects with lots of potentials to get money without going through many legal and financial hoops.

However, the new regulation now makes it a legal requirement for crypto projects to publish white papers and submit them to their respective national regulatory authorities. In the new laws, these regulators will have the power to prohibit the issuance of a project’s token if a raft of requirements is not met.

Compliance with these requirements will not be cheap. Depending on the complexity of the project and the amount of legal advice required, it could cost crypto token issuers anything between $4,500 and $87,000 just for a white paper.

The new regime envisioned in MiCA will also lead to one-off compliance costs ranging between $3.2 million and $19 million. Ongoing compliance costs are expected to cost as much as $28 million per financial year.

Such high compliance costs in what was a relatively easy market to get into will affect smaller projects with modest budgets.

Whales And Market Manipulators To Be Put In Check

The volatility of the crypto market has been caused by the social media activities of specific “market influencers.” Tesla CEO Elon Musk, for example, has used tweets on several occasions to either express his company’s stance on BTC or to shill for Dogecoin. 

Each time Musk tweeted, there was a significant shift in the price of whatever crypto-asset he was talking about. Although it has never been ascertained whether or not Musk personally benefited from these price changes, the danger of social media influencers with his kind of reach manipulating the market for profit is very genuine. 

The MiCA regulation now makes market manipulation through social media and other assorted platforms punishable by law. 

The regulation also prohibits individuals or institutional investors from acquiring dominant positions in the crypto market. Large-volume investors can deliberately or inadvertently affect the price of a token when either buying or selling off large amounts of it. MiCA will ensure that investors in EU-based digital assets do not own a large enough percentage of a cryptocurrency to affect its price whenever they move in the market.

Bitcoin Will Escape Potential Ban - For Now

The MiCA regulation was passed without including a controversial clause that sought to limit the use of crypto assets that rely on proof-of-work mechanisms.

Left-leaning groups in the European Parliament had pushed for the clause to lessen the environmental impact of bitcoin and Ethereum (ETH), which are both very energy-intensive to mine. 

The clause would have forced bitcoin to change its consensus mechanism to one that consumes significantly less energy or risk being banned from the EU market.

While the clause was left out during the vote, provisions were made to include energy-hungry consensus mechanisms in the EU’s taxonomy for sustainable activities. If that happens, BTC and ETH could be forced to counter their energy consumption with commensurate positive contributions to climate mitigation.

If green activists had their way and got bitcoin earmarked as unsustainable or significantly harmful to the environment, it would make the cryptocurrency less attractive to institutional investors and probably cause its price to plummet significantly.

Conclusion

The MiCA is an admirable step towards taming the crypto wild west. The regulation uses a mix of centralized and decentralized authorities to represent national and EU-level bodies.

National authorities will use country-specific rules and procedures to enforce the regulation. Still, the European Securities and Markets Authority (ESMA) and the European Central Bank will have considerable investigatory and supervisory authority.

It is expected that crypto projects venturing into the EU will seek out member states with the most crypto-friendly regulators and set up shop there.