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Global supervision is strengthened, how powerful is the EU-led MiCA Act?

Huobi Research

2022-11-28 12:31

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Original title: "Global regulation is strengthened, how powerful is the EU-led MiCA law?" "

Original source: Huobi Research

On October 10, 2022, the European Parliament Committee passed the "The Markets in Crypto Assets Regulation Bill" (The Markets in Crypto Assets regulation bill, The European Parliament also voted on the Transfer of Funds Regulation (TFR).

Once the MiCA Act is passed and implemented, it will be a milestone in the EU's encryption supervision. The reason why the FTX incident can occur has a lot to do with the lack of supervision of encrypted assets in various countries. The MiCA Act has a clear and strict regulatory system for encryption projects such as encrypted trading platforms and other intermediary service agencies and stable currency issuers. The MiCA Act Not only will the EU countries with fragmented regulatory policies form a unified encryption regulatory system, but it will also affect the encryption legislation of countries around the world, and accelerate the transition of the global encryption market from the "barbaric growth" stage to the "legal era".

Review the history of MiCA formulation:

September 24, 2020——The European Commission passed a proposal on the regulation of the encrypted asset market;

February 2021 19 - ECB Opinion;

February 24, 2021 - European Economic and Social Committee Opinion;

June 24, 2021 - European Data Protection Supervisor Opinion;

2022Year 6 30 March - European Parliament and Council reach provisional agreement;

October 5, 2022——The Council of the European Union approves the final legislative text on the regulation of the encrypted asset market;

October 10, 2022 - Europe Parliamentary committee passes MiCA bill;

The MiCA bill was originally planned to hold a plenary meeting in November this year for a final vote, but a recent EU spokesperson said that the draft needs to be translated into 24 languages, and the final passage time will be postponed to 20232 European regulators will need to give European regulators 12–18 months after the passage of the MiCA legislation in March to write and apply new rules based on the legislation, with implementation expected as early as February 2024. The EU’s MiCA Act has been postponed repeatedly. The original text plan was approved for the first time in June this year, and the final text was only released in October. Therefore, the implementation of the MiCA Act will inevitably be delayed again, but it will not affect its significance to the Crypto industry.

This article will analyze and interpret the MiCA Act from the perspective of regulatory asset types, programs and impact on the industry.

Why is MiCA worthy of attention?

First of all, MiCA has a high level of legislation and a wide range of applications. The European Union previously did not have a unified encryption regulatory framework in addition to unified anti-money laundering regulations. Once MiCA is passed and implemented, it will be directly applicable to the entire EU and surpass the legislation of each member state. MiCA will also grant additional enforcement to national authorities. that power. Encrypted asset service operators in the EU only need to comply with the requirements of one regulatory framework to operate in 27 EU member states with 500 million consumers, and the compliance costs of relevant entities will be greatly reduced.

Secondly, MiCA clarifies the regulatory rules for encrypted assets such as stablecoins and encrypted asset service providers (CASP), providing clear guidance for market players, making the entire industry standardized and conducive to protecting consumers , enhance market confidence.

Finally, MiCA may serve as a model law, influencing crypto regulatory legislation in countries around the world. The rapid development of the encryption market has not only brought financial innovations such as DeFi and NFT, but also caused serious problems such as money laundering, tax evasion, fraud, asset flight, and fostering terrorism. At present, many countries are actively exploring encryption regulatory solutions. The EU’s MiCA Act It is the leading encryption regulatory framework in major jurisdictions around the world. The adoption and implementation of MiCA in the future will not only provide a reference for regulatory legislation in some countries, but may also promote some conservative countries to change their negative attitudes towards encrypted assets.

MiCA regulated asset types

The main regulatory content of MiCA: one is for payment tokens such as stablecoins and other The regulatory requirements for encrypted assets; the second is the regulatory requirements for various encrypted asset service providers such as issuers, providers, trading platforms, etc.

MiCA clarifies the applicable scope of laws and regulations, the classification of encrypted assets, the regulatory body and the corresponding information reporting system, business restriction system, and behavioral supervision system. MiCA establishes a regulatory framework for encrypted assets that are not regulated by existing EU financial laws. Encrypted assets that qualify as financial instruments will not fall under the scope of MiCA's supervision. For example, security tokens and central bank digital currencies are not within the scope of MiCA's supervision.

The enforcement of MiCA will be managed by the supervisory authority designated by each member state and publish its list. The supervisory authority can be a new or existing institution. The supervisory authority at the EU level is the European Banking Authority (European Banking Authority, EBA) and European Securities and Markets Authority (European Securities and Markets Authority, ESMA).

According to whether encrypted assets need to anchor the value of other assets, MiCA classifies encrypted assets into electronic money tokens (electronic money tokens, referred to as EMT), asset reference tokens (asset-referenced tokens, referred to as ART) and other crypto-like assets.

EMT is designed to To anchor its value, it is an electronic substitute for coins or banknotes. Simply put, it is "electronic currency". For example, we use various currency payment methods on the Internet, Alipay payment, WeChat payment, etc.

ART is designed to anchor its value by reference to any other value or right or combination thereof, including one or several official currencies, ART covers all asset-backed assets other than EMT All other encrypted assets. For example, stablecoins USDT and USDC backed by U.S. dollars and treasury bonds, and Pax Gold backed by physical gold assets all belong to ART.

Other types of encrypted assets are all other encrypted assets that are not "electronic currency tokens" or "asset reference tokens", covering various encrypted assets. Compared with EMT and ART, the supervision of other types of encrypted assets is relatively loose, and only need to submit white papers, obtain approval, and comply with general regulatory rules such as marketing/organization/technology.

The encrypted assets that are not under MiCA supervision are:

Other encrypted assets obtained for free. The definition of "free" in MiCA is very strict. Encrypted assets that need to be exchanged for personal information, or that require payment of membership fees, commissions, monetary or non-monetary benefits to encrypted assets are not classified as free encryption. assets;

An encrypted asset, such as Bitcoin, as a reward for maintaining distributed ledger technology (DLT, distributed ledger technology) or verifying transactions;

Used in exchange for The function token of goods or services. Tokens for goods and services that are still under preparation, if the preparation period exceeds 12 months, fall under the scope of MiCA supervision;

Unique and irreplaceable with other encrypted assets (not fungible), that is, NFT assets (MiCA does not directly use the term "NFT").

MiCA's regulatory attitude towards stablecoins, DeFi and NFT

MiCA will pass 1:1 by requiring stablecoin issuers The ratio and part of deposits to build sufficient liquidity reserves to protect consumers. Every stablecoin holder will have access to the issuer's claim at any time, and the rules governing the operation of the reserve will also provide adequate minimum liquidity. All stablecoins will be regulated by the European Banking Authority (EBA).

MiCA's daily transaction number and transaction volume for non-euro-backed stablecoins shall not exceed 1 million and 200 million euros. Currently, the three major stablecoins USDT, USDC and BUSD account for More than 75% of the trading volume, the number of daily transactions and trading volume have greatly exceeded the MiCA regulations. In the future, if the EU insists on implementing regulatory policies on non-euro stablecoins, it may hinder the competitiveness and innovation potential of the EU encryption market.

Because the information structure of DeFi is different from that of traditional finance, standard policies cannot effectively supervise DeFi, and MiCA has not included DeFi in the scope of supervision for the time being. The European Union is piloting the DeFi "Embedded Supervision" program. On September 28, the EU's official website issued a public tender for the "DeFi Embedded Supervision Research" on Ethereum. The bid amount is estimated to be 250,000 euros, and the research is expected to require 15 month to complete. The "Embedded Supervision" solution can enable regulators to obtain the ability to automatically monitor compliance by reading public chain data, which can greatly reduce the need for market participants to actively collect, verify and submit data to authorities.

NFT has not been included in the regulatory scope of MiCA for the time being. According to MiCA, crypto-assets that are unique and not fungible with other crypto-assets (crypto-assets that are unique and not fungible with other crypto-assets) do not fall within the scope of regulation of this regulation, and the European Commission will need to Evaluate and create a regulatory system for non-homogeneous Token (NFT) within the month. MiCA does not use the term "NFT" commonly used in the industry, but adheres to the principle of "substance over form" to describe this type of encrypted asset, that is, its value attributes are attributed to the uniqueness and functionality of each encrypted asset, and each encrypted The value of assets cannot be measured by the same market price comparison method or unified assets. Therefore, the fragmented F-NFT (Fractionalizad NFT) will not be considered as a unique and non-homogeneous encrypted asset; at the same time, the excessive issuance of NFT will also be considered as having a homogeneous nature, which may be subject to MiCA Regulation.

Would the exceptionally strict Fund Transfer Regulation (TFR) be passed?

TFR is the EU is pushing to improve its anti-money laundering ( AML) and Counter-Terrorist Financing (CTF) legislation, which was first presented to the European Commission in July 2021.

Under the rules of the TFR, no amount of cryptocurrency will be transferable between accounts on a Crypto Asset Service Provider (CASP) without personally identifiable information. This is stricter than the 1,000-euro threshold set by Europe's travel rules for the traditional financial sector. When a customer of a trading platform transfers money to a non-custodial encrypted wallet, if the transfer amount exceeds 1,000 euros, it needs to verify that the wallet belongs to the customer, otherwise CASP will not be able to transfer the money. Transfers between two non-custodial wallets are not regulated by TFR.

EU people have mixed opinions on TFR. Supporters believe that it will help clarify the regulatory boundaries for CASP, but more opponents worry that all parties may find it difficult to comply with the technical requirements of the rules. Personally identifiable data doesn't necessarily help fight money laundering either, and TRF violates the EU's Charter on Privacy. As the final MiCA vote is postponed to February 2023, the legislative work of the TFR may also be delayed. Many people expect some improvements in the final text, which fully considers the particularities of encrypted assets without departing from the regulatory goal of improving transparency.

The impact and significance of MiCA on the industry

The four basic goals of the EU MiCA bill are: to establish Regulatory framework, supporting innovation and fair competition in the crypto market, protecting consumers/investors and market integrity, ensuring the stability of the financial system. Some key changes are expected after implementation of MiCA and TFR:

(1) A unified regulatory and law enforcement system will be formed within the EU. The enforcement of MiCA will be managed by the regulatory agencies designated by each member state, and the EU level will be supervised by the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA). Once registered in one EU member state and approved by the regulatory agency, it can be valid throughout the EU;

(2) Clarify the information reporting system of regulated entities such as projects and encrypted asset service providers (CASP), Business restriction system, etc. For example: regulations on marketing information content, information release and information modification of encrypted asset projects;

(3) Effectively protect consumers and prevent encryption market manipulation and insider trading. For example: Stablecoin projects and encrypted asset service providers (CASP) have clear reserve systems and regulatory rules. Projects with greater capital scale and influence will be subject to more supervision, which can effectively prevent incidents like FTX from happening. ;

(4) Strengthen the supervision of important assets and give room for innovation in new things. Some important and mature encrypted assets have been clearly defined and supervised, and encrypted assets with immature regulatory methods such as NFT and DeFi have not been forcibly included in the supervision for the time being, so as to avoid hindering the innovation and development of the project;

(5) Strengthen encrypted asset tracking, anti-money laundering and anti-terrorism. The TFR Act extends the "travel rule" to all encrypted asset transactions, and cancels the minimum threshold and exemptions for low-value transfers. When transferring money within the encrypted asset service provider (CASP) platform, both parties need to provide and store information about the source of the asset and its beneficiary. personal information.

The implementation of the MiCA Act in the future will unify the different regulatory systems of 27 EU countries and create a single encrypted regulatory market, which can reduce the compliance costs and costs of project parties and trading platforms in different jurisdictions. Business expansion costs, for cryptocurrency players in a large market also means better liquidity and more trading opportunities.

The MiCA Act has relatively strict regulations on stablecoins. In addition to regulatory systems such as information disclosure, asset preparation, marketing, and operations, it also prohibits cryptocurrency companies from charging interest on stablecoin deposits; the MiCA Act also targets Intermediaries such as centralized trading platforms have introduced more regulations, which may make some encrypted trading platforms that are accustomed to "barbaric" growth face more compliance restrictions, and may also attract capital and institutions from the traditional financial market to enter the encrypted market. The positive significance of the MiCA Act to the development of the encryption industry is greater than the negative significance. A regulated large market is more conducive to the development of encrypted assets. Compared with large trading platforms and encrypted projects such as Binance, smaller cryptocurrency trading platforms and start-ups may start from Benefit more from MiCA regulation.

Finally, the MiCA and TFR bills are only the beginning of the EU's regulation of the encrypted asset market, and there may still be more changes and uncertainties in the future. There are a large number of review provisions in MiCA and TFR, and a large number of topics will be reviewed and re-evaluated within 1–3 years after the act takes effect, such as "non-custodial" wallets, NFT and the sustainability of the act. In addition to MiCA and TFR, the EU is working on several initiatives with significant implications for the crypto space such as: DLT pilot regime, Digital Operational Resilience Act (DORA), DeFi “embedded regulation” scheme, NFT reporting, digital euro legislation wait.