DECRYPT: Will MiCA model work for global crypto regulation?

CHENNAI: The European Parliament’s final vote on the Markets in Crypto-Assets Act, or MiCA, has brought the European Union one step closer to creating a complete framework for regulating cryptocurrencies. Though the result of the vote was anticipated, it is significant since it makes the 27 EU members pass the first comprehensive crypto law in history.

The question now is can the European MiCA be a model for International Crypto Regulation? Possibly. The EU’s Markets in Crypto-Assets Regulation, which was officially adopted on Thursday, is the broadest framework of its kind. What impact will it have on how nations outside the EU regulate digital assets?

There would be global impact as the EU represents one of the biggest economies in the world. Where the EU goes, others frequently follow, whether it is in terms of data privacy or the structure of modern anti-trust rules. From a business standpoint, the EU frequently sets the bar higher than other nations.

MiCA, in my opinion, builds on current legal frameworks and is a politically viable and practical compromise. Given that the industry is already sufficiently developed and profitability constraints are putting governance and risk management to test, it was crucial to complete the task. It provides entrepreneurs with assurance and prevents governments from responding hastily to a problem in the industry.

However, there is a bit of a weak link. The Commission designed MiCA to regulate token issuers as entities rather than token exchanges as activities by deciding to rely on the legal frameworks already in place. In other words, regardless of how a token is used, the issuer is subject to the restrictions. This, in my opinion, restricts how adaptable MiCA is.

The basis for authorities over the years has been to create activity-based, not entity-based, regulation in order to adjust to the unbundling of financial services. For instance, rather than looking at banks as a category of institution, we now would focus on the behaviour of “buy-now-pay-later” specifically. Now, this is impossible if tokens are issued as bearer instruments since the issuer is not, or has not been, in control of deciding whether their token is used to pay for goods and services or to make investments.

The EU tries to address this by concentrating on probabilities. Saying that as a token linked to a particular currency is more likely to be used for payments than for any other purpose, it ought to adhere to the relevant legal requirements. This is referred to as an e-money token (EMT) in EU terminology. An EMT is regulated as an investment because it fluctuates freely. Tokens indexed to a basket of currencies, commodities, or other assets received a lot of political attention. While the market was busy shifting, Europe was chasing the spectre of Facebook’s stablecoin experiment. In an effort to meet both the payments and the investment use cases, the laws governing these assets are convoluted and confusing.

This spotlights now is how the traditional payment versus investing divide is complicated by cryptocurrency. Although it may be challenging, MiCA Level 2 technical guidelines will attempt to create a clearer border. For MiCA, 20 technical standards must be written, and this one might be the trickiest.

(The writer is founder, India Blockchain Alliance)