In the late hours of June 30th, 2022, the EU Council issued a seemingly succinct and ordinary press release aside from sporadic bits of bold text. However, it marked the official start of a new financial era for crypto-assets worldwide, with Europe leading the charge.
What is “MiCA,” the Markets in Crypto-Assets proposal?
The proposal brings crypto-assets, its issuers, and its service providers into a common regulatory framework for the first time. The proposal treats crypto like fiat currency and weighs it against the fiat currencies of Europe. This includes popular cryptocurrencies and stablecoins.
It strives to “protect investors and preserve financial stability, while allowing innovating and fostering the attractiveness of the crypto-asset sector.”
In other words—it marks the location of the white start line before the marathon.
Prior to 2022’s bear market, the price of Ether on December 31, 2021, for example, was 3,683 USD, an extraordinary run from its launch at around 1 USD in September 2015. Similarly, the market capitalization of Tether—the unofficial premier stablecoin—stood at approximately 78 billion USD.
What does MiCA mean for the future? What kind of growth should we as investors expect?
MiCA, Unwrapped
We found six key points requiring further analysis and discussion.
Consumer Protection
“With the new rules, crypto-asset service providers will have to respect strong requirements to protect consumer wallets and become liable in case they lose investors’ crypto-assets.”
In crypto’s wild beginning, filled with hacking stories and hackers galore, no meaningful consumer protections existed. Hence, the hackers.
Now, crypto-asset service providers remain liable for lost crypto and failing to protect consumer wallets. Likely, most providers will take out insurance—as is done by many popular exchanges currently—protecting against theft, hacking, and similar calamities.
Carbon Footprint Tracking
“Actors in the crypto-assets markets will be required to declare information on their environmental and climate footprint.”
Within two years from the formal adoption of this proposal, the European Commission must provide a report detailing the environmental impact of crypto-assets and what minimum sustainability standards may be necessary.
Proof-of-stake (randomly selected “stakers” validate blockchain nodes) improves upon proof-of-work (all “miners” compete to validate first) by eliminating the energy consumption of the latter. However, it also eliminates some of the top-notch security inherent in hundreds of thousands of Bitcoin miners.
This clause introduces potential insecurity into the fate of proof mechanisms, which we’ll touch upon later in this article.
Anti-Money Laundering
“MiCA requires that the European Banking Authority (EBA) will be tasked with maintaining a public register of non-compliant crypto-asset service providers.”
Providers who maintain a parent company in countries listed on the EU list of nations considered at high risk for money laundering or on the EU list of non-cooperative jurisdictions for tax purposes must implement “enhanced checks” in line with the EU AML framework.
This carries the no-nonsense and no-tolerance approach to money laundering from fiat currencies to crypto counterparts.
Stablecoins in the Spotlight
“MiCA will protect consumers by requesting stablecoins issuers to build up a sufficiently liquid reserve, with a 1/1 ratio and partly in the form of deposits….every so-called ‘stablecoin’ holder will be offered a claim at any time and free of charge by the issuer.”
In addition, all stablecoins intending to operate within Europe and with European residents shall be supervised by the European Banking Authority (EBA), with a physical presence in the EU mandatory.
The bottom line: stablecoins wishing to operate in the EU must remain infallible and open themselves to liability should they fail their mandate of stability.
Immediate Regulation
“Under the provisional agreement reached today, crypto-asset service providers (CASPs) will need an authorisation in order to operate within the EU.”
Further, national authorities will be required to regularly transmit relevant data concerning the largest CASPs to the European Securities and Markets Authority.
This immediately acts upon nefarious or less-than-holy actors in the European crypto space. It supplies the groundwork for the great push forward supporting legitimate crypto-asset and stablecoin providers.
NFTs Saved for Later
“Within 18 months the European Commission will be tasked to prepare a comprehensive assessment and, if deemed necessary, a specific, proportionate and horizontal legislative proposal….”
Non-fungible tokens (NFTS) are digital assets representing real, non-fungible assets like art or collectibles. At this time, the EU Council is not treating NFTs like cryptocurrencies, defined as crypto-assets in this context.
Instead, we have the wait-and-see approach. Regulation down the road remains entirely possible.
The Deltec View
We saw five separate, clear themes behind the EU Council’s proposal driving the future growth of crypto-assets worldwide.
A Vote of Confidence
Despite 2022 marking a fantastic Bitcoin crash (Ethereum too), this proposal by the EU Council delivers an incredible vote of confidence for experienced, new, and prospective crypto-asset buyers. It paves the way for mass adoption and strives to give crypto a badge of legitimacy.
Bad Actors, Digital or Otherwise, Are Unwelcome
Hacking coupled with money laundering paired with market manipulation creates an unhappy love triangle. The EU Council treats the darker side plaguing crypto-assets seriously. We expect little mercy, swift action, and possibly the demise of altcoins that fail to meet their standards.
Yet each instance of justice also promotes greater crypto adoption. If the public bodies of the EU can demonstrate solid control over crypto-assets, then they have indirectly cemented them as part of the modern portfolio.
Proof-of-What?
While the original proof-of-work designed by Bitcoin’s Satoshi Nakamoto remains the most secure blockchain consensus mechanism, it comes with a hefty environmental price tag. Perhaps, this tag is too much.
With carbon footprint tracking and standardized reporting becoming necessary, could proof-of-stake supersede proof-of-work? Could another proof mechanism take over instead?
Consumers, Protected
The “Wild West” philosophy fails to apply in Europe, because, there is no American frontier in Europe. Geography aside, the EU wants to use a harsh, take-no-prisoners approach to criminal actors in the financial and digitally financial realms.
A major, if not primary, deterrent slowing the adoption of crypto-assets was the lack of any bank balance protection. The USA touts the Federal Deposit Insurance Corporation (FDIC), protecting up to $250,000, while the EU maintains deposit guarantee schemes (DGS), reimbursing up to €100,000.
In the current proposal, crypto-asset service providers become liable for damages as a way to recoup consumer losses. This also opens the road for later public protection of certain crypto-assets, such as Bitcoin or Ethereum, in the event of a service provider’s demise.
Keep Stablecoins Stable
Regulators seem to view stablecoins (i.e., Tether, USD Coin) more favorably than traditional cryptocurrencies owing to their limited volatility and ethos of remaining pegged to a fiat currency such as the US dollar.
However, the language inside this proposal quietly condemns the recent insecurity surrounding stablecoins. The recent demise of Terra Luna, possibly due to a personal attack on one of its co-founders, likely caught the attention of the EU Council.
Here, the same council provides a road to redemption. Stablecoins can exist in Europe, but only through vetted, deposit-backed methods proven to maintain liquidity and free currency exchange.
Disclaimer: The author of this text, Jean Chalopin, is a global business leader with a background encompassing banking, biotech, and entertainment. Mr. Chalopin is Chairman of Deltec International Group, www.deltecbank.com.
The views, thoughts, and opinions expressed in this text are solely the views of the authors, and do not necessarily reflect those of Deltec International Group, its subsidiaries, and/or its employees. This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service, or offering. It is not a recommendation to trade.