The year 2022 will not be remembered fondly in the cryptocurrency market. There are several reasons for this. The progressive decline in the value of coins, the problems of the FTX exchange and the collapse of trust are all raising questions about the future of crypto. Can regulating the crypto-asset market be a panacea for the market’s ills?
The very public demise of FTX
The declaration of bankruptcy by FTX – the third largest cryptocurrency exchange, has triggered an earthquake within the industry.
According to Changpeng Zhao, the CEO of Binance, the world’s largest cryptocurrency exchange, the collapse of FTX marks the beginning of a crypto crisis.
He warns that the consequences could be comparable to the days which saw the collapse of Lehman Brothers in 2008 and the ensuing financial market crash.
He adds that consumer confidence could be shaken enough to set the crypto market back many years. The gravity of the situation is also indicated by the exchange rate of Bitcoin, the world’s most popular virtual currency, which has already fallen to around $16,500 from its previous value a few weeks ago of approximately $20,000 – which does not seem like such a huge decrease, until you consider that at the end of 2021 it was as high as $60,000.
Stefan Berger, member of the European Parliament, argues that the FTX crash would not have happened if the market had been regulated. Changpeng Zhao also believes that proper regulation could have minimised the impact of such events.
Industry calls for regulation of the cryptocurrency market
The lesson to be learnt from recent events is, first and foremost, that there is a need for greater financial transparency for cryptocurrency service providers.
The answer to this need lies within market regulation, and along these lines, it is worth discussing the legislation that the European Union is currently working on, the Markets in Crypto Assets (MiCA) regulation.
MiCA is part of the European Union’s larger digital finance package.
Other documents contained in this package include:
- The Regulation of the European Parliament and of the Council on operational digital resilience for the financial sector (DORA)
- The Regulation of the European Parliament and of the Council on a pilot regime for market infrastructures based on distributed ledger technology (DLT)
- The Communication on a Retail Payments Strategy for the EU.
MiCA aims, among other things, to create a uniform legal framework for the cryptocurrency market in the EU, to introduce a uniform rule for crypto issuers and crypto service providers (including exchange operators), and to ensure market stability and protect investors from risk.
What MiCA regulates
Among the crypto-actives covered by this regulation are:
- utility tokens, i.e. assets that are not treated as money but as a right to a future product or service, which by definition act as digital vouchers;
- asset-linked tokens (stablecoins), i.e. cryptocurrencies that should, by definition, maintain a stable value by reference to another asset (e.g. to another crypto-asset or to the dollar exchange rate) – according to the EU legislator, such cryptocurrencies generate the highest risks, as they aspire to act as a means of payment;
- tokens which are e-money whose main purpose is to be used as a medium of exchange and whose value is maintained by reference to the value of fiat currency.
Excluded from the MiCA regulation, however, are, among others:
- DeFi, or decentralised finance
- CBDCs, or central bank digital currencies, which are the equivalent of FIAT currencies issued by central banks based on blockchain infrastructure
- NFTs, i.e. non-fungible tokens (except those offered in large series, which may be considered exchangeable)
- Cryptocurrencies that can be categorised as financial instruments.
Who is covered by the MiCA regulation
In terms of entity coverage, MiCA covers two categories of entities – crypto-asset issuers and crypto-asset service providers.
The initial obligation for asset issuers (with the exception of, inter alia, crypto assets offered for free or crypto assets ‘created’ automatically as a reward for maintaining a DLT or approving a transaction) is to publish a so-called white paper, a document that will be a simplified equivalent of a prospectus.
MiCA also establishes a regulatory framework for crypto-asset service providers (CASPs). Entities providing such services must be authorised by a Member State, be established in the EU with their management actually taking place in the EU.
It is worth noting that CASPs, like other EU-regulated financial institutions, once authorised in a Member State, will be able to provide such services throughout the European Union under the single passport mechanism.
MiCA will take care of cryptocurrency investors
MiCA also provides for obligations aimed at ensuring the safety of investors. In the context of recent events, this is a rather sensitive issue.
Among other things, MiCA imposes requirements for CASPs to maintain a minimum capital. In addition, these entities are required to secure their clients’ ownership rights in cryptocurrencies, in particular against their insolvency, and to prevent the use of cryptocurrencies for their own account. All funds received from clients must in turn be held at a credit institution or central bank.
MiCA also provides for the right of retail token holders to withdraw their offer to purchase the cryptocurrency within 14 calendar days from the date of the initial agreement. Retail token holders must be able to exercise this right without incurring additional costs or having to provide any justification.
It is worth mentioning that MiCA also incorporates several environmental factors that are increasingly popular today.
CASPs are required to publish online information related to the main adverse environmental and climate impacts of the consensus mechanism of the particular cryptocurrency for which they provide services.
ESMA and EBA have been mandated to develop regulatory technical standards setting out the specific information that CASPs will need to provide to comply with this requirement.
MiCA will create a harmonised European crypto-asset market that will provide legal certainty across the EU through clear asset classification and transparent guidelines for service providers and issuers. If the regulations meet with widespread acceptance, it can be cautiously predicted that more institutional investors and more assets will enter the market which should stimulate its further development.
In addition, MiCA, due to the scale of the European single market, could follow in the footsteps of the General Data Protection Regulation (GDPR) and also contribute to shaping similar regulations in other parts of the world.
Unfortunately, we will still have to wait for the changes to be implemented.
The European Parliament’s vote on the draft, originally scheduled for early December, was postponed until February next year at the earliest due to the need to translate the complex and lengthy text of the draft.
The regulation is expected to enter into force in 2024.
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