The European Union has been praised for its proposed law to regulate crypto assets, the Markets in Crypto Assets Directive (MiCA), as it was an ambitious attempt to create a new regulatory framework for all unregulated crypto assets. When Europe proposed it in 2020, it was the first of its kind, but almost two years later, it is still awaiting a parliamentary vote, which was supposed to take place last Monday but was delayed at the last minute.
The reason for delaying this long-awaited vote was to avoid a possible misinterpretation of some provisions that could prohibit the use of cryptocurrencies that use proof of work to validate transactions. This would include the two most popular cryptocurrencies, bitcoin and Ether.
While some European countries have raised environmental concerns related to the use of proof-of-work crypto assets, MiCA’s initial goal is not to ban any type of currency. Stefan Berger, the rapporteur in charge of preparing the report for the European Parliament, said on Twitter that “it is critical to me that the MiCA Directive is not misconstrued as a de facto ban on bitcoin.”
There is no new date for the vote yet, but if this is the only pending issue, we could see a new vote scheduled for late March or early April.
Regulating or prohibiting more activities than the text originally intended is one of the risks stemming from the 168-page MiCA document. But there are other areas that could also be reviewed or changed, considering the recent developments in the cryptocurrency industry.
One activity that is heavily regulated is stablecoins. The proposal, drafted in 2019 and introduced in 2020, appears to be driven by fears of systemic risk posed by Facebook’s now-defunct Libra stablecoin. MiCA proposes to create a new ad hoc regulation for stablecoins, which is not necessarily a bad thing, but the requirements and prohibitions laid out in the law make it very difficult, or even unattractive, for stablecoin issuers to create or trade stable currencies in Europe.
First of all, MiCa states that, “in the EU, no stablecoin may be offered to the public or admitted to trading on a crypto-asset trading platform, unless the issuer is authorized in the EU and publishes an approved ‘white paper’ by the national competent authority (NCA)”.
Second, the proposal also establishes conduct obligations for stablecoin issuers. It establishes rules and requirements for potential marketing communications and ongoing reporting obligations, such as the obligation for issuers to establish a complaints handling procedure. More requirements would mean issuers would have to comply with conflict of interest rules; notification of changes in its management body to the competent authority; governance arrangements; own funds; the pool of assets backing the asset-referenced tokens (i.e. stablecoins); and on the custody of reserve assets.
Third, issuers must invest reserve assets only in assets that are safe and low-risk, and disclose the rights attached to asset-referenced tokens. Additionally, it prohibits stablecoin issuers and crypto asset service providers from granting interest to asset-referenced token holders, which may result in a ban on practices such as yield farming or staking.
This latest ban is another example of regulation that can be looked at further, as it may conflict with other policies such as central bank digital currencies (CBDCs). Interest-bearing accounts for stablecoins may be a good option to complement CBDCs, which are unlikely to carry any interest and could prevent funds from flying from commercial bank accounts to CBDCs when consumers perceive their deposits to be at higher risk.
MiCA was drafted when private stablecoins were considered unregulated products that could pose significant systemic risk to the financial system. Two years on, central banks and governments appear to view stablecoins as a more manageable risk if properly regulated. Therefore, regulations need to strike the right balance between mitigating or eliminating this risk and providing a framework for creating and issuing stablecoins.