The drawbacks to the new EU’s proposed cryptocurrency regulations
Press Release

The drawbacks to the new EU’s proposed cryptocurrency regulations

written by John Murphy | February 28, 2023

The European Union has proposed new cryptocurrency regulations. This will be the first comprehensive crypto law known as the Markets in crypto assets (MiCa) regulation. However, the law still has some drawbacks to it that should be resolved.

It seems that the EU’s new much-awaited crypto laws have been delayed more than once now. The voting on the new rules was recently deferred to April 2023. Whereas previously it was already stalled once from November 2022 to February 2023 and is still seeking a vote to date.

Technical difficulties so far have been the major reason behind the delay of this pan-European crypto framework. Nevertheless, that can only happen in 2024, by the mid of last year when the writing of the MiCa rule was still in process, a number of shocks have already stricken the industry which raise concern among people and there is no doubt that the next year won’t be filled with hot news of crypto.

Now the question arises whether is MicA actually a proper crypto regulatory framework despite all of its drawbacks to it. Will it be effective enough to deal with the issues related to TerraUSD or FTX?

The European Central bank president, Christine Lagarde definitely came across these questions which is why during the FTX scandal she made a statement telling people that, “there will have to be a MiCA II, which embraces broader what it aims to regulate and to supervise, and that is very much needed.”

Modifications needed in EU DeFi regulations

MiCa lacks even the basic mention of the future of finance which is DeFi. the current draft has no information regarding DeFi which is one of the future’s organizational and technological forms in the crypto space. This error or probably negligence might cause an issue later on.

Regulating DeFi is essential and a global issue says the CEO of Bittrex global Oliver Linch. He further added that MiCa won’t make an exception on DeFi rules. He considers DeFi unregulatable and also a low priority for regulators as all of the interaction in the crypto space takes place through crypto exchanges.

According to an interview, Terrance Yang shared her belief that even investment and commercial banks are interested in the yield-bearing, lending, and borrowing of collateralized crypto assets and they should be dealt with and regulated accordingly. She further implied that the sustainability requirements can be helpful as they are formulated in MiCa. for example, the umbrella of MiCa the DeFi projects may be classified as delivering crypto assets services.

Crypto Lending and Staking

Although DeFi is one of the important aspects, still not the only issue with the MiCa. there are other limitations to it as it also failed to mention the common practice of crypto lending and staking.

Keeping in view the recent circumstances like the failure of lending giant Celsius or the scrutiny of American regulators over crypto staking it has become essential for EU to add both of these matters to their crypto regulatory framework.

Yang observed a specific issue regarding the uneven regulation of lending and staking in the European Union. Interestingly, the crypto market currently benefits from a lopsided advantage due to less restrictive regulations compared to the traditional banking system in Europe. Legacy commercial and investment banks, as well as traditional fintech companies, are subjected to comparatively strict regulation than crypto exchanges, crypto lending, and staking platforms, which are arguably heavily under-regulated.

“Either let the free market work with no regulation at all, except maybe for fraud or make the rules the same for all who offer economically the same product to Europeans.”

Furthermore, the MiCa also lacks considerable or at least adequate information on the regulation of nonfungible tokens. Apparently, the NFTs were left entirely out of the context. However Peter Kerstens the European commission advisor mentioned that despite the absence of NFTs in the MiCa they intend to regulate it generally as a cryptocurrency.

This implies that NFT issuers will be dealt with in the same way as the providers of the crypto assets and therefore mandated to periodically report their operations to the relevant local authorities or the European Securities and Markets Authority.

Reasons for the crypto trader’s optimism

Mica has so far been warmly accepted by most of the crypto industry. It sure has some constraints that come along while implementing the rules but despite that, the rules seemed rather reasonable and encouraging in terms of market legalization.

In light of the unrest of 2022, it remains uncertain whether the next hypothetical successor to EU regulations “MiCA-2,” will adopt a more rigid or cautious stance toward cryptocurrency. “The further delays MiCA has faced have only highlighted the idle approach taken by the EU to introduce legislation that is needed more now than ever before, particularly given recent market events,” Linch criticized.

Lima anticipates a more focused approach with more topics addressed. Hence it is critical for European legislators to keep up with regulatory changes:

“I expect a more robust approach to be taken in some of the technical standards and guidelines that are currently being worked on and will form part of the MiCA regime. We might also see greater scrutiny by regulators in authorization, approval and supervision, but ‘crypto winter’ will have long since thawed by the time the legislation is revised.”

At the end of the day, it is important not to fall prey to stereotypes about the European Union’s bureaucratic machinery and its reputation for tardiness. While the EU may not operate as swiftly as its American counterparts, it is still a powerful force in the legal realm.

Although MiCA legislation has significant symbolic importance, however, there are urgent issues in the crypto industry that may require less ambitious legislative or executive actions. Nevertheless, the tone and substance of these actions remain critical, as demonstrated by the EU’s recent decision to require banks to hold 1,250% risk weight on their digital asset exposure.