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Crypto Rules in Europe: MiCA and HMT Proposals in the Spotlight
Striking a balance between innovation and regulation.
Published on15 Nov, 2023
While innovation drives the blockchain world, it is essential to have a regulatory framework to gain trust and greater adoption. Most countries are in a race to adopt the technology, while also making sure that the regulatory strategy benefits the users fairly. The European Union (EU) is gearing up to set a pioneering example with its Markets in Crypto Assets law, MiCA. Covering everything from stablecoins to insider trading, MiCA promises a comprehensive crypto framework. Similarly, the UK government wants to turn the country into a crypto hub, by creating their regulatory framework. In this article, we'll explore some cryptocurrency regulations and their repercussions.
Markets in Crypto Assets Law (MiCA) marks the first time that a major jurisdiction has attempted to put together clear and concise laws and definitions pertaining to the cryptocurrency industry. In its 150-page text, the Law has attempted to provide legal certainty and compliance to provide structure to an industry which has otherwise remained quite “wild”. The goal was to properly harness cryptocurrencies by creating a legal framework that can help attract investors and blockchain engineers to the technology and into the European region. A total of 27 countries that account for a fifth of the global economy will come under this MiCA law in 2024.
Even though it is built on the EU’s existing laws for security trading, MiCA is still a custom-tailored regulatory solution which addresses the unique challenges of the digital currency ecosystem. MiCA casts a wide net, encompassing various crypto-assets not governed by other regulations. This includes e-money tokens, asset-referenced tokens, utility tokens, and other crypto-assets offered to the public. The broad scope reflects the regulation's ambition to cover a significant portion of the crypto industry.
🚀 #MiCA enters into force at the end of June.— ESMA - EU Securities Markets Regulator 🇪🇺 (@ESMAComms) June 12, 2023
🗓️ To begin implementation, #ESMA with relevant stakeholders will launch 3⃣ public consultations in July, October & Q1 2024 → https://t.co/AvePQSapZp.
🔜 Details on the duration of each public comment period. pic.twitter.com/QFlERttwxR
MiCA is built on four fundamental objectives:
Ensuring Legal Certainty: MiCA fills the regulatory void by providing a robust legal framework for crypto-assets not currently covered by existing financial services legislation.
Supporting Innovation and Fair Competition: The regulation seeks to foster innovation in the crypto-asset sector by creating a safe and proportionate framework. This encourages businesses to develop crypto-assets while maintaining competition integrity.
Protecting Consumers, Investors, and Market Integrity: MiCA acknowledges the risks associated with crypto-assets, and places emphasis on safeguarding the interests of consumers, investors, and the overall market.
Ensuring Financial Stability: The regulation incorporates safeguards to mitigate potential risks to financial stability, addressing one of the crucial concerns in the crypto landscape.
Under MiCA, any company offering crypto assets to the public is obligated to release a transparent and unbiased white paper that provides a fair warning of associated risks without misleading potential buyers. Unlike traditional securities prospectuses, MiCA allows crypto white papers to be published prior to regulatory approval. MiCA’s approach does provide some much-needed clarity and a tailor-made solution, which is arguably healthy for the growth of this ecosystem.
Under MiCA, crypto-asset service providers, including crypto exchanges, wallet providers, and custodian wallet providers, are required to secure authorization from national regulatory authorities to operate within the EU market. This meticulous licensing regime has been designed to bolster consumer protection and market integrity by ensuring that only reputable entities can offer crypto-related services.
Moreover, MiCA introduces provisions for cross-border passporting, enabling crypto-asset service providers authorized in one EU member state to extend their offerings seamlessly across other member states. This is a significant step towards creating a single, unified market for crypto-assets within the EU.
MiCA places a strong focus on stablecoins, known as "e-money tokens" (EMTs) when tied to fiat currency value and "asset-referenced tokens" (ARTs) otherwise. It imposes stringent requirements on stablecoins, including maintaining adequate reserves and robust governance. MiCA also introduces a regulatory framework for initial coin offerings (ICOs) to enhance transparency and innovation, while endorsing the creation of regulatory sandboxes to facilitate experimentation in the crypto-asset sector.
However, a very noticeable omission is staking. Staking, in spite of being a major pillar in the cryptocurrency space—does not get a mention; its absence from current legislation introduces uncertainty within the regulatory landscape. European Central Bank's Christine Lagarde has highlighted this omission and called for its inclusion in a potential sequel to MiCA.
Despite a few shortcomings, MiCA still counts as major progress towards regulation. Importantly, the impact of MiCA extends beyond the EU, given the region's substantial economic influence, potentially influencing global cryptocurrency markets as companies worldwide may need to consider compliance with MiCA standards to access the EU market.
The United Kingdom, unlike the EU, has proposed a different approach, instead of creating a fresh new system like MiCA for crypto regulation. The HMT Proposals plan to add cryptocurrencies to the rules in the Financial Services and Markets Act (FSMA) dating back to the year 2000. This move comes from the view that bespoke laws would create confusion, overlap and distort competition.
The new regulations will require companies to register again, follow Financial Conduct Authority (FCA) rules and meet anti-financial crime rules that are tougher than the current money laundering regulations (MLR). While having similar goals there are some notable differences between MiCA and HMT - MiCA seeks to provide legal clarity and structure to the crypto industry, while the HMT Proposals build upon the UK's existing regulatory structures.
The HMT Proposals in the UK also require authorization for cryptoasset-related activities, such as trading venues, intermediaries, lending platforms, and custodians. However, the UK approach is more segmented, with separate provisions for different types of firms, including detailed requirements for each category.
One significant difference between MiCA and the HMT Proposals is passporting. MiCA allows authorized cryptoasset service providers to offer their services cross-border within the EU, with the ability to establish branches in other member states. The HMT Proposals do not include passporting rights for authorized cryptoasset service providers. Instead, the UK intends to establish equivalence arrangements for overseas firms, but the specifics are yet to be defined. This represents a distinction in the approach to cross-border activities.
The HMT Proposals in the UK do not specifically address the issuance of stablecoins. Instead, they focus on regulatory outcomes for fiat-backed stablecoins, leaving certain aspects of stablecoin regulation to be determined under existing regulatory frameworks. This results in a difference in the regulatory treatment of stablecoins between the two regimes.
We're working to make the UK a global cryptoassets hub. We want to see the businesses of tomorrow, and the jobs they create, here in the UK.— Rishi Sunak (@RishiSunak) April 4, 2022
Today @JohnGlenUK set out how we are going to encourage crypto investment and technology in UK markets. 👇https://t.co/MdZ5IOLZtH
Both MiCA and the HMT Proposals currently lack specific provisions regarding the regulatory treatment of staking activities in the cryptoasset space.
Above all, these new changes will encompass various aspects of the industry. Some provisions like regulations on crypto lending can give the UK a competitive edge, as these rules are not present in MiCA as of now. The country has plans to become a major blockchain hub—and these plans are a foot forward.
Regulations and clarity play a pivotal role in making blockchain a viable long-term solution. However, it's worth noting that the European Union's recent proposal for the Markets in Crypto Assets (MICA) framework notably missed addressing staking, highlighting the challenge of adapting regulations to the rapidly evolving landscape of crypto and blockchain technologies. Staking, powered by proof-of-stake mechanisms, currently stands at the forefront of the crypto industry, but clear and comprehensive regulations for staking have yet to be clearly defined.
On the global stage, certain jurisdictions, such as the U.S. under the scrutiny of the SEC, have shown a propensity for heavy-handed regulation, which has raised concerns among crypto stakeholders. A regulatory approach that lacks dialogue and finesse can potentially stifle innovation and hinder the progress of blockchain technology. It's evident that such stringent scenarios may lead blockchain firms to contemplate relocating to more accommodating jurisdictions, with investors exploring riskier, less-regulated paths.
In light of these challenges, the consensus among traders, industry leaders, and forward-thinking organizations is that regulations should be characterized by thoughtfulness rather than punitive measures. The aim should be to establish smart regulations that strike a balance between fostering crypto innovation and ensuring investor protection.
At Luganodes, we recognize the importance of adhering to these evolving regulations and actively participating in discussions to influence their development positively. We are committed to maintaining our position as a trusted name in the industry by staying compliant and providing a secure and innovative platform for our users as we navigate the evolving landscape of staking regulations in the EU, and globally.
Staking and cryptocurrency are still nascent, and, as with any new technology, it takes time for authorities to catch up and integrate it into their systems. On one hand, having some form of regulation makes the technology more widely accepted and builds investor trust. It also prevents large-scale problems such as bankruptcy and other threats. On the other hand, regulating with an iron fist and attempting to fit a new shape into an old regulatory mould will not bode well for the technology. Balance is essential in all things, and this equilibrium can only be achieved through education and dialogue.
Luganodes is a world-class, Swiss-operated, non-custodial blockchain infrastructure provider that has rapidly gained recognition in the industry for offering institutional-grade services. It was born out of the Lugano Plan B Program, an initiative driven by Tether and the City of Lugano. Luganodes maintains an exceptional 99.9% uptime with round-the-clock monitoring by SRE experts. With support for 30+ PoS networks, it ranks among the top validators on Polygon, Polkadot, Sui, and Tron. Luganodes prioritizes security and compliance, holding the distinction of being one of the first staking providers to adhere to all SOC 2 Type II, GDPR, and ISO 27001 standards.
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