MiCA: The good, the bad and the ugly of EU cryptocurrency rules

Author: Mike Sarvodaya, Cointelegraph; Compiler: Songxue, Golden Finance

The European Union passed the Markets in Cryptoassets Act (MiCA) in April despite malicious claims from U.S. regulators such as SEC Chairman Gary Gensler that it has been “clear for years” when it comes to cryptocurrencies. ), took practical action. While MiCA is not perfect, it is a critical step in the right direction for our industry and sends a signal to America that if we continue to stagnate and rely on outdated regulations, we will be left behind.

Similar to how Bitcoin leverages old technological, economic and financial concepts to build something new, regulators must redesign existing regulatory and financial security frameworks to create a successful environment for participants. There are many useful and effective elements in our existing financial and regulatory framework.

On the other hand, the blockchain industry has many issues that cannot be adequately addressed by traditional regulatory frameworks – which can lead to frustration and a waste of resources as lawyers argue over potential interpretations of statements rather than comply with clearly defined legislation.

Although Web3’s practical applications show great potential, it is still a reorganization of the traditional financial system—albeit one that strives to improve efficiency, openness, and fairness for all participants.

MiCA: A necessary but mediocre step towards regulation

Despite the complex language of financial and securities regulation, the situation is actually simpler than it appears. Simply put, our regulations try to prevent people from doing bad things to other people. For example, terrorists send or receive funds to facilitate acts of terrorism, or fraudsters make fraudulent claims to investors. It also includes ensuring that licensed individuals and entities are held accountable to a set of operating standards that have historically been developed in modern financial markets.

In a more technical sense, the laws governing these operating standards are:

• Anti-money laundering and counter-terrorism financing laws
• Securities and Commodities Law
• Market infrastructure regulation

Although the SEC maintains that existing regulations broadly cover these three issues, many elements are not captured in these definitions, rules, and penalties from approximately 100 years ago. We can mainly attribute this problem to two things.

** The first is the classification of digital assets. ** Are they commodities, securities, or an entirely new category? Digital currencies often exhibit one, both, or neither of these characteristics, which poses a serious dilemma for existing frameworks.

Overview of the key points of MiCA. Source: Circle

**Second, the rate of innovation far outpaces the slow and complex adaptation of traditional financial regulatory frameworks. ** Governments have a responsibility to create regulations that are robust enough to prevent misconduct and protect stakeholders, yet flexible enough to accommodate the progress this nascent industry promises. How are these institutions supposed to compete with smart contracts that can be deployed in minutes and upgraded the same day to have completely different logic and parameter sets?

For those of us in this rapidly evolving industry, it's clear that we need new regulations and guidance commensurate with the unique advantages and challenges that Web3 offers.

MiCA is a promising endeavor, although the framework will struggle as individual EU member states test the framework in their own courts and build an example of a patchwork of cases with mixed results. That being said, here's the good, the bad, and the ugly of MiCA.

MiCA: Benefits

The best part about MiCA? **Stricter rules and bigger penalties for crypto asset servicers who lose customer funds! ** This is a long-standing problem in the cryptocurrency space, when exchanges and wallets are hacked or compromised and lose user funds, exchanges and wallets are not responsible, resulting in tens of billions of dollars in losses, while users no choice. This is unacceptable and directly results in many in our industry being irreparably destroyed by bad actors.

MiCA: The Bad

Although it sets the main goal of preventing market manipulation, most manipulation takes place outside the EU (via offshore entities), so it doesn't really help many people directly. It could help indirectly, though, as it signals to the market the direction the regulator is heading — though that also depends on the penalties imposed when the case goes to a judge.

Notably, decentralized finance and future central bank digital currencies are excluded. While the exclusion of DeFi might be seen as a positive, the fact that the vast majority of on-chain transactions and activity is DeFi is frustratingly overlooked.

MiCA: The Ugliness

Unfortunately, there are many worrying or "ugly" elements in MiCA that readers must be aware of, not just that they are EU citizens.

• The "Travel Rule" dramatically increases the monitoring and recording of financial transactions and online activity in unprecedented ways, forcing service providers to identify the recipient and sender of each transaction.
• A very low reporting threshold of €1,000 has led to increased oversight compared to Bank of America's traditional threshold of $10,000. Given that the vast majority of financial wrongdoing is committed by large banks and institutions through money laundering and other fraud, it is galling to subject ordinary people to Orwellian scrutiny. *Formal approval from legislators is required before launching a token or liquidity. This will significantly inhibit, directly or indirectly, the number of legitimate projects launched within the EU. It's hard to assume that the queues will be short and the process will be fast - governments have proven time and time again that they are slow and inefficient, especially when new technologies are involved.

There is another core problem with any regulation in the EU that bears repeating: the fragmented nature of the EU court system makes it difficult to draw meaningful conclusions about the impact of individual future rulings. In short, this is a small win for Web3 that requires more work from regulators around the world.

This is in stark contrast to the U.S. court system, which has traditionally (though not Web3) been a unified and solid basis for legal adjudication. A series of piecemeal rulings makes it unlikely that other countries will actually follow MiCA at full speed; instead, they will likely wait for the United States to come up with its own substantive framework and regulatory guidance.

Regulators, exchange operators and founders have all said they will proceed very carefully and slowly until the U.S. develops a substantive set of regulatory guidelines. While they may have some inspiration from MiCA, it's not the North Star they need.

The blockchain industry is at a crossroads for both regulators and users. Countless people have had their life savings wiped out by fraud and scams, while regulators struggle to keep up with the rapid pace of industry innovation.