Introduction to MiCA – how will it regulate the crypto world?

The questionable credibility of the crypto market

Is this the end of crypto? The Economist asked in its latest issue. The crack in the crypto world’s fundaments appeared after Sam Bankman-Fried’s emporium collapse. FTX, the cryptocurrency exchange valued at $32bn, had prominent investors in their portfolio, such as Sequoia – Silicon Valley’s most esteemed venture company. The founder – Bankman-Fried, was a crypto golden boy with a degree in physics from the Massachusetts Institute of Technology and a Jane Street Capital trainee. The picture looked just perfect.

An unfortunate run on the FTX exchange exposed a massive hole in Bankman-Fried’s balance sheet, resulting in FXT declaring bankruptcy in America, leaving more than an aftertaste for many users.

Crypto, yet again, got the label of being a fraud. The FTX mess left a challenge for the ones still in the game. How to reassure crypto users that crypto is the future of finance? What can or must be done in the crypto ecosystem to re-establish its credibility?

Introducing MiCA

The lack of legal regulations has been a crypto market downside. Crypto’s high volatility risks and questionable liquidity make the news regularly – this year’s Luna precedence or the 2014 Mt. Gox case.

We face a paradox of the growing demand for crypto transactions and the growing fear of entering the market at the same time.

The EU spotted the problem. On October 2nd this year, the European Council approved MiCA – Markets in Crypto-Assets regulation, which presents fundamental changes that regulate the risks related to crypto assets and help financial services use the crypto assets’ potential. For the first time, there will be adequate customer protection on a level similar to traditional investment protection.

Each cryptocurrency service provider will require a permit, and only legal entities, with a registered office in one of the EU member states, will be able to apply for it.

The application for that permit will require an extended list of information on the applicant, for example:

• the name (including the legal one)
• the legal status
• specification of the crypto assets services to be provided
• a description of the governance arrangement
• confirmation of relevant knowledge and skills of the provider
• descriptions of the IT system
• security procedures – to name just a few.

The application process will be challenging, The permit will be difficult to obtain. The relevant authority will have 25 days for the application assessment and further three months of investigation and making a decision. There will be a possibility to withdraw or suspend the permit.

Future goals

MiCA is planned to achieve four goals;

1. Clearly define the crypto assets
2. Encourage innovation through a secure framework, encouraging fair competition
3. Provide an adequate consumer care
4. Guarantee financial stability with the possibility of recognizing stablecoins as a widely accepted means of payment.

The transparency of crypto assets, the authorization, and supervision of crypto assets providers, tokens, and electronic money as well as consumer protection rules will be laid down. The idea is to put in place measures to prevent market abuse and ensure the integrity of crypto-asset markets.

MiCA should enter into force in Q4 2024.