MiCA’s impact on the EU crypto industry - harmonization, competitiveness, institutionalization, and market share gains for regulated businesses.
For the European Union (EU) crypto industry, the Markets in Crypto-Assets Regulation (MiCA) represents a true game changer. Until now, crypto companies in the EU had to knock at every single national regulator’s door if they wanted to serve the entire EU market.
Some countries like France, Germany, or Austria have dedicated crypto licensing regimes in place, while others like Ireland have created AML registration obligations. Outside of those mentioned, many countries didn’t have any regulatory frameworks in place for crypto businesses. Navigating the complex national regulatory patchwork of 27 different rulebooks became a very costly and burdensome endeavor. Undoubtedly, this has constrained the growth of EU startups, and limited their competitiveness vis-a-vis their US or Asian counterparts. Under MiCA, the same binding EU requirements will apply to all 27 member countries. Once a company has been granted a MiCA license in one country, it will be able to “passport” it and offer the licensed service throughout the entire single EU crypto market.
With MiCA in force, offshore, unregulated companies will no longer be able to target EU consumers pro-actively. Not least due to the recent FTX meltdown, the reverse solicitation rules, i.e. the rules under which foreign businesses can onboard EU customers that act on their own initiative, can be expected to be stricter than for other financial service providers in traditional markets. This may lead to MiCA-regulated crypto businesses gaining significant EU market share from their offshore, unregulated competitors.
Plus, MiCA will, in all likelihood, lead to more institutional adoption and activity in the EU crypto market. According to Bloomberg, only 4% of institutional funds in Europe have exposure to crypto-assets. Regulatory uncertainty is one of, if not the main concern holding institutions back from entering the space. I expect major European banks will roll out crypto-asset services in the next 48 months, be it custody, exchange, or the issuance of e-money tokens or asset-referenced tokens, colloquially referred to as stablecoins.
To sum up, expect MiCA to increase the competitiveness and market share of regulated businesses and the institutional share of overall activities and services provided.
The creation of regulatory clarity amidst global uncertainties could very well attract capital, talent, and companies, especially those looking to issue tokens from the rest of the world. Crypto, as an industry, could become a huge opportunity for an economic and technological revival of the EU.
However, much of MiCA’s practical success boils down to the implementation standards and enforcement practices to be developed by the EU supervisory authorities in the next 12-18 months.
Some MiCA passages carry the risk of burdening industry participants, and their full effects will only become apparent once technical implementation standards provide practical operational guidelines.
The worst case scenario is one where only a minority of EU crypto startups manage to shoulder the substantive legal and compliance costs of an ongoing bear market, stablecoin issuers make a detour around the EU, and exchanges face burdensome disclosure requirements and liabilities that don’t benefit consumers and make their offerings uncompetitive compared to offshore counterparts. EU consumers would either be cut off from innovation or continue to use (and be exposed to) the largest offshore pools of liquidity and utility.
Additionally, supervisors could consider that most NFT and DeFi projects actually fall within the scope of MiCA and need to comply - a door that is still left open to interpretation by current MiCA recitals. This would inevitably lead to teams and resources migrating out of the EU.
MiCA could represent a positive boost for EU crypto businesses and the EU economy overall, but its success is highly dependent on the upcoming development of practical implementation standards.
MiCA’s global impact - will MiCA set global standards?
MiCA’s potential to become for crypto what GDPR is today for privacy, an almost globally adopted regulatory standard, is certainly there, but far from a foregone conclusion.
Undeniably, MiCA will play a huge role in how other jurisdictions, especially those without much experience in financial regulation and supervision, think about their own crypto-asset framework. A closer look into the recent Financial Stability Board(FSB) recommendations for crypto service providers and so-called “global stablecoin arrangements” is all it takes to realize how many of the MiCA concepts have found their way into global standard setting bodies.
The EU market is the single largest internal market in the world with 450 million relatively wealthy consumers. By the sheer size of its market, MiCA will likely persuade many companies around the world to adopt MiCA operating standards, possibly on an international scale in order to maintain globally streamlined operations and products. The global impact of EU regulatory standards has been observed in a number of industries, from the chemical industry to agriculture or tech, and coined as the “Brussels effect” by Columbia Law School Professor Anu Bradford.
It is not by coincidence that the current U.S. CFTC Commissioner Caroline Pham warned that “as the U.S. struggles to provide regulatory clarity to the domestic crypto industry, global regulatory frameworks like MiCA could fill the gap.”
The longer the US regulatory vacuum for crypto-assets persists, the greater I expect the global impact of MiCA standards to be.
However, it is only MiCA’s practical success that will matter at the end of the day, and much of the practical implementation work still lies ahead of us. If MiCA proves to be workable for the industry, consumers and regulators alike, it will have a global impact. If not, many jurisdictions will decide to choose an entirely different policy path.
Since industry participants can have a lot of impact on making MiCA a success by responding to the upcoming consultations on implementation standards, I encourage all crypto projects and companies to engage closely with EU supervisors - primarily the European Banking Authority and the European Securities and Markets Authority - in the next 12-18 months.
So far, MiCA is without any doubt the most comprehensive regulatory framework for crypto-assets we have seen on a global scale. The industry has been calling for regulatory clarity for years, and should not miss the opportunity to contribute to making it a success.