MiCA Regulation: Pros and Cons

Intro

Today, a snapshot of the situation in Europe shows that some form of regulation is needed for a very simple reason: current rules are difficult to apply. Thus, the MiCA Regulation is introduced.

Premise

Before introducing the positive and negative aspects of the Regulation, an important premise must be made.

Today we talk about the introduction of a regulation but we must understand what meaning is attributed to it, because, from what we see, blockchain and crypto assets are certainly a very dynamic sector, still very much at the beginning, which can develop very quickly. Moreover, it is a sector that will become very important for finance in general because at the moment Stable Coins, the digital Euro, tokenized assets, and so on are arriving – a series of elements that directly affect banks and financial operators. Therefore, from my point of view, I understand that there is a desire to introduce a regulation, but we must also be careful not to slow down the development of a sector that in some way has already entered the minds of most people, with its risks and its benefits. However, it is true that there are specific cases of abuses and scams, such as that of FTX, which is the most recent in the field of cryptocurrencies, but it is also true that customer awareness of risk in this sector has increased and is very high. Today there is no user who loses money because they made a mistake in buying cryptocurrencies and then believes they were unfairly damaged; everyone knows that there is a potentially great opportunity but, at the same time, everyone knows that there are risks that need to be taken into account.

MiCA regulation: pros and cons

That said, after years of intense negotiations and a political agreement reached about 10 months ago, the MiCA Regulation was finally formally voted on and adopted today in the plenary of the European Parliament. This represents a community regulation that will regulate the crypto activities sector and will provide guidelines that service providers will have to comply with to operate regularly in the Union. This rule, however, represents only a part of a broader and more complex rule, which falls within a package called the Digital Package, which originated a few years ago and consists of a series of other regulations that together aim to capture a unitary regulation to understand when these crypto assets are financial instruments and, in that case, it modifies the already existing regulations.

The MiCA Regulation deals with the vast majority of assets that fall into the conventional category of utility tokens, as well as e-money tokens that are part of Stable Coins. This is an extremely complex regulation that fundamentally lacks the fact that the community legislator has almost taken inspiration from existing regulations, typically those of financial markets and, unfortunately, by taking large pieces of financial market regulations it is already a bit crippled because it does not exactly capture the peculiarities or opportunities that this technology could actually provide to some sectors to help their development, without disturbing financial markets.

In addition to what has been defined in the premise, the Regulation presents some significant negative factors, including:

1. the regulatory burden, that is, the burden that could create compliance with the regulation for issuers and for exchanges of crypto assets, which could be costly and require a lot of time, especially for small companies. This could in some way discourage innovation and the growth of the Industry especially if the regulatory requirements are considered too burdensome. This concept is linked to the above issue of having to give a regulation trying, however, not to suppress the underlying technology.
   
   
2. ambiguity in regulatory decisions, where in fact some conditions clash with each other and do not give a clear result. For example, the classification of NFTs within the MiCA legislation unfortunately is not clear because, while art. 2 (3) and its related Recital 10 suggest that NFTs should remain outside the scope of MiCA, Recital 11 states that if NFTs are issued in a “large series or collection” they can be considered NOT to be actually fungible, which means their issuance and other integrated services (for example, an NFT market) could be subject to MiCA requirements.

In addition to these initial considerations, slightly contrary to the MiCA Regulation, some positive conditions must be mentioned.

The first is that this regulation represents a global Benchmark, that is, there is no one else in the world who has thought of doing such a thing so much so that the SEC today is even trying to annul the effects of blockchain technology in the field of cryptocurrency transactions, considering each of these, except bitcoin, a security token. Furthermore, in relation to the regulation of crypto assets, it is trying to do something similar, copying a bit from Europe that started earlier and it is in this sense that Europe is proposing itself as a leader in this homogeneous regulation activity. The fact that other countries copy from Europe is not to be considered a negative fact because being a global economy, the more the regulations of other economic areas actually become similar to those of Europe, the easier it is for companies to develop their business.

Another positive point is the greater legitimacy created by this regulation. The regulation of the crypto asset markets will help the legitimacy of the crypto asset industry. By providing, for these, a clear regulatory framework, it helps to promote greater trust among investors, to attract more capital to the industry and to stimulate innovation and growth in the sector, offering more opportunities for investors to participate in the market.

Also in favor is investor protection. This regulation will certainly provide investors with greater protection through a series of measures, such as requiring issuers to disclose relevant information to investors and imposing stricter rules on exchanges that trade crypto assets, increasing the transparency and accountability of the market. By doing so, investors would be more able to make informed investment decisions.

Considerations

Beyond every element, whether positive or negative, an important factor to consider and not to underestimate is that it is not correct to say that the MiCA Regulation will provide protection from scams or market manipulation. Specifically, the MiCA Regulation is not meant to prevent fraud itself.

Take the case of Bernard Madoff, who exploited all existing regulations to create funds, which were regulated and in turn had a depositary bank. It was a privilege for the industry to invest in his funds because Madoff himself had an excellent resume.

The same goes for FTX and its founder and CEO Sam Bankman-Fried. The best of international finance gave him money, and I don’t think they were naive. All this happened precisely because he presented himself well and with highly regulated structures.

This means that the solution is not always to be found where there is a fraudulent attitude. With or without regulation, those who want to defraud others organize themselves to sell non-existent financial products, fully complying with the regulations.

I also want to clarify that there are complex phenomena that need to be activated to accompany new technologies in achieving a proper regulatory framework that allows obtaining results that are complementary, and for this, the MiCA Regulation must come to the aid. On the one hand, the company needs to know on what grounds it can invest and by what rules to play this market game that cannot be placed in a domestic sector only; on the other hand, users must be guided to understand in depth what the risks and opportunities are, and the protections they may have in this sector.

Conclusions

In conclusion, I want to make a final observation. If today I buy Bitcoin and set it aside, there is, on one hand, the risk that I may lose part or all of the invested value; on the other hand, Bitcoin might earn a lot and therefore, according to many, become a financial product. At this point, in some European countries, including Italy, the definition of transactions of financial products, if not properly interpreted and respected, could pose the risk of imprisonment, as established by the Italian Criminal Cassation. In other states, including Germany, France, and the Netherlands, this situation is always considered unlawful, but only on an administrative level and not on a criminal one. In certain countries, it is even allowed to initiate transactions with financial products because there is no specific rule.

Thus, with the MiCA Regulation, beyond the positive or negative points, there is a need to standardize the taxonomy of all Europe to create legal harmonization, fill the gaps in regulatory arbitrage, and allow companies to operate on a European basis without the need for 27 different licenses and supervisors.

Made by Giovanni Piccirillo, Fintech Lawyer and Co-Founder of Mood Global Services B.V.