The New MICA Regulation: Can it be a framework for future regulations?
The DeFI Space has been waiting for a major regulation that will prevent better oversight while still maintaining the core values of Decentralization and transparency provided by blockchain technology. We might find the solution to that in the form of the Market in Crypto Assets Regulation recently greenlit to take effect by the EU Commission in 2024. So what is this new MICA Regulation that is creating all the buzz in the DeFI Space? How will it help shape the framework for future regulations to be imposed within the DeGI Space?
The EU Parliament steps in before the U.S……
Regulations in the DeFI space are always a debated topic amongst its stakeholders with some people realizing that the space needed some form of oversight while others are quite satisfied with the crypto space treated as a separate unit from traditional finance. Whether you are pro or against regulations, one thing that is a certainty is that regulation will be needed if the goal for DeFI Space is to gain major adoption and become more mainstream for its users.
The regulation comes in many shapes or forms with each country adjusting them to their long-term plan for the DeFI Space and while some are constricting like the banning of digital assets in China, some are imposed to expand innovation such as the issuance of crypto-related licenses adopted by UAE. With the ever-expanding institutions and enthusiasts within the DeFI Space, it is good news to hear that more countries are adopting the latter approach than just constricting it.
With this in mind, all of the DeFI Space look toward the USA as the world superpower country to provide a benchmark of regulations for the DeFI Space but that has just been materialized. It was many months ago when the USA introduced a bipartisan bill that would provide a regulation toward the DeFI Space but there has not been a clear conclusion as Senate Representative Patrick McHenry announced that it will be ready in 2 Months.
While all this was happening, the EU parliament was swift to ratify their bill containing MICA Regulation which will take effect in mid-2024 and early 2025. What is MICA Regulation you may ask? The Markets in Cryptoassets (MiCA) Regulation is the EU regulation governing the issuance and provision of services related to cryptoassets and stablecoins. It is ratified and adopted on April 20, 2023, by the European Parliament with MiCA deemed as the first and only legislation of its kind in the world and leads the way for other jurisdictions.
The MICA Regulation was first proposed in September 2020 as a part of its digital finance strategy to streamline and create uniformity in crypto regulation with the EU Countries. One of the main reasons behind this proposal is to protect the value of the Euro (EUR) from the rise in popularity of US Dollar Backed Stablecoins such as Tether (USDT) and Binance USD (BUSD) while simultaneously increasing the transparency and governance of the use of these tokens. It also aims to curb crypto money laundering and combat the deficiency in crypto-related law within the EU Countries.
One of the key details in the MICA Regulation is its clear framework of dividing the crypto coins/token into 3 distinct categories. First comes the Utility token category which refers to any projects that are unique in terms of value it provides to the users including governance such as BAT or MakerDAO. Then there is ARTS or Asset Referenced Tokens which are coins/tokens that are backed by an underlying asset such TetherGold and lastly, E-Money Token which comprise centralized stablecoins such as USDT, USDC, and BUSD.
The MICA BILL does not include NFTs or DEFI as a whole but the EU Parliament is working to provide clear regulation for these asset sectors as well. It also currently does not cover blockchain-based coins such as Bitcoin, Ethereum, or Cardano but we should expect more clear transparency from the exchanger platforms that are trading these coins. This is why the MICA Regulation is a friendlier option as a whole for the Decentralized Space and instead is targeted more towards Centralized platforms.
One of the key details that are interesting from the regulation is how it also covered the listing process of digital assets to EU exchangers. Yes, it does not cover blockchain-based tokens but for any utility tokens to be listed in Centralized Exchanger within the EU Region, developers will need to provide a clear whitepaper to the authorities and the project must be launched within 1 year of the submission of the whitepaper. This is essential to reduce the number of projects that go on ICO with a promise of being launched someday but vanish when the ICO period is done. These Utility tokens also have a cap of trading volume within the EU Region to a 200 Million Euro limit per day.
This will be an issue for traders and exchangers because if we see the Global Trading Volume of USDT and USDC IS at 1–4 Billion Euro per day with the EU Region alone at the 500 Million Euro limit per day which currently exceeds the cap. The MICA Regulation also subjects Asset Referenced Tokens to provide a whitepaper to the authorities outlining 3 disclaimers which are that these Asset Referenced Tokens may not always be transferable, may not always be liquid, and have a possibility of going to zero. This is done to avoid another Terra UST Case from happening again.
Currently, we only have a glimpse of what the MICA Regulation comprises and its implications as it is still expanding its reach to include new sectors within the DeFI Space. It is still at its infancy stage and will need more inputs from all its stakeholders but at this moment, the EU Parliament has shown it is much more open to adapting its regulation with every advancement happening in the DeFI Space. All we can do is currently wait until the final version unfolds in 2024!
Can it be a framework for future regulations?
In terms of the regulatory framework that is adopted by many different countries, we can see there has been a shift in sentiment as the years have gone by. From the initial discussion of imposing a ban on the DeFI Space to more open regulations adopted by countries such as the EU and UAE. The MICA Regulations can certainly be more of a driving force towards the latter direction as countries realize the potential of the Blockchain and DeFI Space.
On the surface what the MICA Regulation did well is putting a distinction between the Decentralized and Centralized space. The classification of Digital Assets although has not included everything provides an easier platform for developers to understand where they stand in the category. It also does well in preventing the bad projects from the Decentralized to gain an easier passage to the Centralized through the distinction in the whitepaper.
Is it perfect in its current form? Not as there are a lot of sectors such as P2P Loans and NFT Marketplace that have the potential to be misused but it is still not covered in detail within the regulation. The current trading cap policy will also be a talking point for the months to come leading up to the deployment of the regulations in 2024 or 2025. It is ever-expanding and will be more robust as more inputs from the stakeholders are received.
All in All, more countries have shown to be more friendly towards the DeFI Space and this is a good sign to take forward in the years to come. The MICA Regulation can be a framework to be considered for a future superpower such as the USA in deploying its regulation. What we know is that with more than 50 countries registered within the European Union, we can expect a much more seamless regulation that could help in developing the DeFI Space within the region.
We at Nagaya Technologies Pte Ltd. surely believe that a proper regulatory framework could help provide the structure needed for the Crypto Space to operate efficiently. This resonated in our principles which are to provide Legality and Transparency to our holders to promote trust and value. Our vision is this should not only create trust but also value for the stakeholders of our Hybrid Crypto Asset. To know more about Nagaya Technologies and the world’s first hybrid cryptocurrency, you can read our whitepaper through our website at nagaya.io
Or you can talk to us at t.me/nagayaofficial
