The MiCAR Regulation (cryptocurrency regulation in the EU) intervenes on cryptocurrencies and the blockchain. Its implementation will change the European scenario, here is what to expect from the entry into force.
The European Union has been following cryptocurrencies as the fourth most popular financial instrument among investors for years, Morningstar recently wrote in its first crypto asset analysis.
After various studies conducted both on the basic blockchain technology (the first dates back to February 2017 by the Research Service of the European Parliament) and various studies on the use of crypto assets, the European Union has chosen not to oppose their use but to regulate the sector .
A choice judged positively by companies linked to cryptocurrencies, because regulation allows an acceleration of orderly development with positive economic effects for the EU.
The new MiCAR regulation (Market in Crypto Asset Regulation) was introduced in order to regulate the entire sector with, on the one hand, the aim of protecting consumers and investors, and on the other hand promoting the expansion of services related to assets. digital in general and ensure the development of the underlying technology.
In addition to the positive aspects that we will see shortly, according to the critics, there are some non-positive aspects, such as the timeframe for implementing the regulation deemed too long.
The entry into force of each component of the text is in fact expected between 2024 and 2025, while in the crypto world the birth of new niches occurs quickly.
As an example, decentralized finance (DeFi) and the use of non-fungible tokens (NFT) exploded as “phenomena” while MiCAR was being developed in Brussels.
Furthermore, the regulation would be born with other unresolved criticalities, the most evident of which concerns the use of personal cryptocurrency wallets.
To understand how the legislation will change the scenario in Europe, let’s start with the four financial objectives of MiCAR.
The MiCAR regulation has the positive choice not to prohibit, but to provide certain rules for all actors:
The regulation relating to crypto-asset markets (MiCAR) and amending the EU directive 2019/1937, intervenes on four fundamental pillars which can be summarized as follows:
The intervention by MiCAR on these four points makes the user of cryptocurrencies understand that many things will change in the relationship between crypto exchanges and other providers of crypto financial services, the consumer / investor, and the authorities. national verification and control.
As is already the case for regulated financial instruments, financial instruments linked to crypto assets will also require the platforms to issue a prospectus (KIID: Key Investor Information Document).
The prospectus forms part of the “pillar” of client protection, and serves to provide transparent information and create awareness in the potential investor before subscribing to the instrument.
The KIID contains detailed information on the structure of the instrument, the risk and other important information to understand what you are going to invest in.
The second pillar on which MiCAR will intervene concerns the execution of transactions and the monitoring of trading activities.
At the moment, no cryptocurrency exchange platform is monitored according to a specific regulation within the European Union. In principle, this could lead some platforms to manipulate prices for their own benefit.
Therefore, the European regulation will intervene to avoid market manipulations on cryptocurrencies, and this could lead to greater confidence in the long term, facilitating the entry of new investors.
Most investors, in fact, do not like markets without transparency and where speculation is the undisputed king.
For those investors looking for stable long-term growth, knowing that a given asset class fluctuates by 50% or more over a few months is unsustainable.
The financial stability of the markets transformed by technology passes through the IT security guarantees that companies will be required to implement in their respective platforms.
Stability is also guaranteed with macroprudential rules, which keep the financial system stable as a whole.
In practice, the third pillar of MiCAR will intervene in solving the cybersecurity deficiencies shown by some crypto exchanges over the years, in order to prevent theft of customers’ funds.
But it will also intervene to avoid and dissuade bad actors from trying to operate with bogus and scam trading platforms as in the case of QuadrigaCX, whose story was recently told by the docufilm Trust No One produced by Netflix.
Financial services that will offer cryptocurrency-related products and tools will have to carry out customer due diligence (KYC) and apply anti-terrorist financing and money laundering procedures, as banks already do.
In this respect, most crypto financial services are far ahead, but the MiCAR regulation will strengthen control by forcing platforms to report suspicious transactions to supervisory authorities, just like banks do with their customers’ transactions.
In addition to the four pillars of the regulation, there are critical issues. One of these concerns the so-called “self-hosted crypto wallets, which users download from the application stores of their mobile device or from the web for computers, and use without having any intermediary to manage their cryptocurrencies.
With the approval of the fifth AMLD5 anti-money laundering directive, which entered into force in 2020, the European Union established a principle of standardization of transfers made with cryptocurrencies to bank transfers.
In practice, just as a national and international transfer are subject to monitoring by the relevant authorities, so too must transactions made with cryptocurrencies.
The new MiCAR directive does nothing but underline this point to make it effective in the legal systems of the 27 EU member states.
Its implementation, however, appears difficult to apply in the case of self-hosted crypto wallets.
The principle of how self-hosted cryptocurrency wallets work is very similar to how we store cash in a wallet bought in a store. No shopkeeper asks the buyer for due diligence before buying a wallet and indicating how much cash he will put in it or to whom he intends to “transfer” it.
Transaction confidentiality is one of the basic principles of cryptocurrencies, created to circumvent the control over money. For the European Union this is not permissible and crypto wallets must be subject to monitoring.
It should be noted that a debate on this issue is also underway in the United States, with financial authorities intending to introduce transaction monitoring on self-hosted crypto wallets.
The prospect of an overly regulated cryptocurrency market, if on the one hand it guarantees greater stability, on the other it could “kill” the competition.
The MiCAR regulation is however judged positively as a whole, since it does not prohibit the use of the asset class and aims to favor the underlying technological development.
Thanks to the greater awareness and familiarity on the part of the European legislator, then, in the coming years, some updates to the regulation could be made to the benefit of a freer use of crypto assets.
Finally, a note on the availability of the text of the MiCAR regulation, published in full on the European Union portal EUR-Lex.