Rules for Crypto Tokens, Stablecoins, Exchanges

A significant milestone for crypto rules in the European Union was reached on Oct. 5 as the EU Council endorsed and published the approved text of the much anticipated Markets in Crypto Assets (MiCA) law. The act, which is set to take effect in 2024, still has to be voted into law by the European Parliament with the vote anticipated in December.

MiCA introduces a crypto licensing framework for the EU and establishes requirements for stablecoins as well as identity verification requirements for crypto exchanges. Following intense political negotiations between EU bodies and lobbying groups, the main provisions of the act were agreed in June.

At that time, the EU had said that MiCA will set high consumer protection standards and ensure a level playing field in the “Wild West of the crypto-world.” Publishing of the finalized text has been mostly welcomed by the EU crypto community.

MiCA states it will define crypto assets as broadly as possible so regulation can keep pace with the rapidly changing digital asset market. The act specifies three types of crypto assets that will fall under its purview - eMoney (referring to stablecoins that reference one official currency), Asset Referenced Assets (all other crypto currencies with a financial use), and Utility Assets.

The EU has specified strong disclosure and information rules and provided guidance for issuers of digital assets and crypto asset service providers (CASPs) in order to be licensed by the European Securities and Markets Authority (ESMA). It grants powers to the ESMA to decide what information crypto asset issuers need to provide in their white papers, with especially strong requirements for stablecoins.

Stablecoin reserves need to be “segregated and insulated” and ensure that consumers are “fully protected in case of insolvency.” Non-euro stablecoins are limited to transaction volume of 200 million Euros per day in the EU. Concerns in the EU over the fate of its own digital euro initiative is thought to be the reason for this curb, which will affect the largest stablecoin tokens (Tether, USDC and BUSD) dollar-denominated stablecoins that are already well in excess of those limits.

Non-Fungible Tokens (NFTs) will theoretically not come under the MiCA regulation, however they will need to qualify as “unique and non-fungible” assets. It remains to be seen how EU authorities will define these terms.

Other rules include a requirement for CASPs to protect consumer wallets and the platforms can be held liable for losing consumers’ crypto assets. The European Banking Authority (EBA) will maintain a public register of non-compliant and non-supervised CASPs to prevent EU licensed service providers from dealing with them.

Many in the European Web3 community expressed concern over the new rules, saying they could lead to a lot of compliance burden on the sector.

“This marks a new era for crypto regulations in Europe because this could mean a very different crypto market once the regulation comes into effect,” said Marina Markezic, co-founder of lobby group European Crypto Initiative, during a Twitter Spaces discussion.