We will discuss what the proposed MiCA regulation is, its main objectives and its points of contention. We will also look at the recent Committee on Economic and Monetary Affairs (ECON) European Parliament session’s vote of the latest proposed MiCA draft and its consequences for the crypto world. For further information on this subject and for professional legal assistance or advice, contact us at email@example.com | +356 2016 1010 or reach out to us on our social media.
This all harks back to 2018, when Member States of the European Union (EU) sought to take steps to impose a regulatory framework on virtual assets, including cryptocurrencies. A few years later, the EU made it clear that they wanted to increase their competitiveness in Fintech markets as the European Commission (EC) implemented an extensive new Digital Finance Package as of September the 24th 2020, aiming to transform the European digital economy.
According to a press-release by the European Parliament (EP), it is noted that cryptocurrencies are neither issued nor guaranteed by a central bank or a public authority, thus rendering them out of the scope of EU legislation. The EP further argues that cryptocurrencies create risks for consumer protection and financial stability, possibly leading to market manipulation and financial crime. In addition to this, there is also a great environmental concern: crypto-assets are validated using carbon-intensive mechanisms (proof-of-work).
The MiCA essentially is a proposed regulatory framework which categorises crypto-assets into: Asset Referenced Tokens (ARTs – a.k.a stablecoins) and e-money tokens. MiCA embraces a comprehensive, EU wide legislative proposal on crypto assets that inherently is supposed to help to streamline distributed ledger technology (DLT) and virtual asset regulation in the EU, whilst protecting users and investors. Otherwise known as Markets in Crypto-Assets (MiCA), the proposal strongly focuses on rules to regulate crypto-asset types such as stablecoins and crypto-asset service providers (CASPs). In other words, MiCA is the EU’s legislative package for governing digital assets.
Under MiCA, stablecoin issuers and CASPs whose market volumes exceed “significant” thresholds are to be subjected to legal obligations and strict due diligence requirements. The EC claims that it has tried to be fair “where possible” and that “the requirements imposed on crypto asset service providers are proportionate to the risks created by the services provided.”
There are four main objectives, as noted on the Explanatory Memorandum issued by the European Commission, within the MiCA legislation:
MiCA’s draft proposes to limit the use of cryptocurrencies powered by proof of work (PoW) and rather promote those powered by proof of stake (PoS). The main difference being that the latter does not need to add more blocks within the blockchain (less mining, more environmentally friendly) and is generally seen as harbouring less risk for attacks on the network.
Crypto assets are to be subjected to the EU’s “minimum environmental sustainability standards concerning their consensus mechanism used for validating transactions, before being issued, offered or admitted to trading in the Union.” This would require cryptocurrencies currently traded in the EU to shift their consensus mechanism from PoW to PoS. Although cryptocurrencies such as Ethereum are currently working on this shift, it is unsure whether others can follow suit.
The crypto-community hit back at this idea of shift, with some Fintech professionals stating that this “essentially means that the EP will be advocating and endorsing against free markets and competition”.
The argument centres around consumer protection, which could be harmed by a Bitcoin ban in Europe. Due to the nature of digital assets, even if ‘banned’ digital assets remain available in Europe, they would remain available but just not on safe and regulated EU platforms. Furthermore, this would present severe consumer protection concerns as consumers would be forced to access foreign platforms that may be hard to understand and have less (or no) regulatory oversight.
Particular retaliation was directed at the language used for the proposal to be voted by the EU Parliament on March the 14th 2022; Article 2a. It calls for a complete ban of any PoW-based crypto-assets:
“...[c]rypto-assets shall be subject to minimum environmental sustainability standards with respect to their consensus mechanism used for validating transactions, before being issued, offered or admitted to trading in the Union”.
Dr Scerri Herrera, Partner at Michael Kyprianou Fintech, stated that “this is not only impulsive and unhealthy but this is dangerous. The bread and butter of the EBA (money) is being threatened and the reaction of authorities is not only to regulate (which is needed) but to ban PoW coins and restrict asset-referenced tokens and Stablecoins from bearing interest”.
Some may argue that the EBA and the EU’s interest is to ultimately endorse the monopoly of money. If consumers should be able to decide whether they want to keep their money with private issuers/players, decentralised tokens or central bank issued money, how is the ban going to help this cause?
Another point of contention is the claim from the EP that PoW consensus mechanism is carbon-intensive – even more that traditional currency exchange mechanisms. Dr Scerri Herrera asserts:
“Sustainability is just an excuse and makes no sense. Do you know what the real cost of normal transactions on MasterCard rails or SWIFT? It is far higher use of energy than mining of bitcoins. Also in payments the use of plastic and chips for the cards leaves a massive carbon footprint! This move is deliberate and driven by the interests of the ECB. They would rather drown the European economy in inflation and high interest rates than give individuals the freedom of choice to use and adopt alternative assets as feel threatened that they may flourish. The Era of the monopoly of money is upon us. Society has become so institutionalised and complacent. I would have expected a bigger uproar for the safekeeping of freedom”.
Some argue that PoW is actually a needed consensus mechanism in order to separate transaction validators (miners) from wealth owners (coin holders). In addition, the consumption of power serves to protect the network against external attacks, while remaining transparent (transactions). Looking onto the future, mining is shifting towards renewable energy, with a clear objective to reduce its dependency on fossil-fuels.
The EU parliament has voted against the PoW ban in the Markets in Crypto Assets (MiCA) legislation (32 against, 24 in favour), which means that mining of Bitcoin and Ethereum is allowed, at least for now.
The MiCA draft will be negotiated during a trialogue between the EU Commission, Parliament, and the council. This it leaves space for further discussion on regulating crypto assets. However, if the draft is approved as is, the law will come into force within a few months and crypto companies will be offered a six-month transition period to comply with the changing requirement.
Dr Scerri Herrera continues:
“Although this is seems like a win for the crypto community, I would say that his is a lesson learnt or eye-opening moment at how quickly things can change. We need to educate regulators and ensure that they understand key fundamental concepts of the industry, the advantages it affords and most importantly the consumer demand for the space. Now that the parliament has voted against the de-facto PoW ban with a good margin, it leaves space for further discussion on regulating crypto-assets”.
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