EU Parliament approves MiCA: Blockchain leaders share their thoughts

The European Parliament yesterday approved the first rules for tracing crypto-asset transfers, preventing money laundering, as well as to ensure supervision and customer protection.

After 529 votes in favor, 29 against, and 14 abstentions, this first piece of EU legislation marks a milestone for the crypto asset ecosystem in the region at a time of great uncertainty in the United States.

The texts will now have to be formally endorsed by Council, before publication in the EU Official Journal. They will enter into force 20 days later.

Crypto transfers must always be traced, suspicious ones blocked

The regulation aims to ensure that crypto transfers, as is the case with any other financial operation, can always be traced and suspicious transactions blocked.

The so-called “travel rule”, already used in traditional finance, will in the future cover transfers of crypto assets. Information on the source of the asset and its beneficiary will have to “travel” with the transaction and be stored on both sides of the transfer.

As previously covered by FinanceFeeds, the law will also cover transactions above €1000 from so-called self-hosted wallets (a crypto-asset wallet address of a private user) when they interact with hosted wallets managed by crypto-assets service providers. The rules do not apply to person-to-person transfers conducted without a provider or among providers acting on their own behalf.

MiCA tackles market manipulation and money laundering

With 517 votes in favor, 38 against, and 18 abstentions, the Plenary also gave its final green light to new common rules on the supervision, consumer protection, and environmental safeguards of crypto-assets, including crypto-currencies (MiCA). The draft law agreed informally with the Council in June 2022 includes safeguards against market manipulation and financial crime.

MiCA will cover crypto-assets that are not regulated by existing financial services legislation. Key provisions for those issuing and trading crypto-assets (including asset-reference tokens and e-money tokens) cover transparency, disclosure, authorization and supervision of transactions. Consumers would be better informed about the risks, costs, and charges linked to their operations. In addition, the new legal framework will support market integrity and financial stability by regulating public offers of crypto-assets.

The agreed text includes measures against market manipulation and to prevent money laundering, terrorist financing, and other criminal activities. To counter money-laundering risks the European Securities and Markets Authority (ESMA) should set up a public register for non-compliant crypto assets service providers that operate in the European Union without authorization.

What will be the impact and what to do next?

FinanceFeeds shares the insights of blockchain industry leaders from Quant, Kraken, and Xapo Bank, including the impact of the MiCA regulation and what to do next.

Gilbert Verdian, founder and CEO of Quant, commented: “The passing of the first set of comprehensive digital asset regulations is encouraging. It will be interesting to see how much the UK aligns to the EU’s regulations, or if it will take a more open approach to boost trade and economic growth. Rules must be flexible, dynamic and evolve with the times. Ultimately, however, regulation can be a force for good. It is a clear sign that the industry is reaching a much-needed new stage of maturity. It can put in place the rails to encourage the development of new and better forms of money, simultaneously protecting consumers and markets. While each jurisdiction will take a slightly different approach to protect its national interests, the EU is leading the crowd.

“This new regulation also balances the need for central banks to mitigate systemic economic risks, against stablecoin development and innovation. There are less onerous obligations for smaller stablecoins; and NFTs are out of scope. Blockchain will have a profound impact in financial services – especially in asset management via the tokenisation of funds, in capital markets, and perhaps most importantly, in tokenised commercial money and central bank digital currencies. This emerging technology can substantially lower costs by reducing the need for counterparties and complex processes, enabling new business and revenue opportunities.”

Mark Jennings, Head of European Operations at Kraken, said: “MiCA is a bespoke and pragmatic blueprint for cryptoassets to evolve within a regulatory perimeter. What once seemed a lofty legislative goal could soon become a universal standard for customer protection and business efficiency, if the EU can get the technical implementation of this framework right.

“The crypto world’s eyes are rightly glued to Europe as MiCA enters this final stretch. There are three key areas that will be crucial for European policymakers to focus on going forward:

1. Prioritise a structured transitional arrangement between national VASP regimes and a pan-European framework with universally agreed upon grandfathering processes. This is currently at the discretion of each EU member state. However, a coordinated approach might be more beneficial to stakeholders, as well as being in the pan-EU spirit of MiCA.

2. Ensure consistent MiCA implementation across Member States, especially at the licensing stage to ensure a level-playing field and avoid regulatory arbitrage.

3. Establish MiCA to be harmonized and compatible with international standards for financial markets across the globe. MiCA will be a tough act for some jurisdictions to follow, so prioritising global coordination prior to technical implementation will be beneficial to all parties over the longer term.”

Joey Garcia, Director and Head of Public Affairs at Xapo Bank, said: “We very much welcome the raising of standards for Crypto Asset Service Providers across the EU having operated within a prudentially supervised VASP Framework which came into place in 2018 in Gibraltar. The EU has also closely followed the principle of ‘same activity, same risk, same rules’ and of course while we fully support the creation of a secure environment for digital finance, it will be interesting to see whether the ‘same rules’ can be applied proportionally to a young and innovative industry.

“Also beyond MiCA, the wider implications around the EU Digital Finance package will also need to be considered by the industry. The question of whether the capturing of unhosted wallet transfers within the EU Transfer of Funds Regulation, can be efficiently introduced, or the implications of the proposed AML Regulations under the supervision of the new anti-money laundering agency restricting transfers in excess of EUR 1,000 from an unregulated or self hosted platform.

“What will the implications be for DeFi integrations and crossovers? Similarly, while the categorisation of virtual assets in new categories is also constructive and forward looking, are the rules proportionate to the industry? do they introduce a technology infringement where the use of blockchain based systems will essentially trigger financial services regulation, regardless of the activity? Will all European authorities interpret the Regulations in the same way? There will be lots of interesting developments over the next few years without question. From our point of view, operating to standards around governance, risk management, the protection of client assets, resilience, customer care and market integrity are not new concepts for the regulated Xapo VASP so we welcome the introduction of higher standards that go beyond simple AML registrations.”

Bradley Duke, co-CEO at ETC Group, stated: “At ETC Group, we applaud yesterday’s approval of MiCA by the European Parliament. We have seen that when individual countries in the EU put in place a cohesive regulatory framework for companies working with digital assets, it encourages growth, innovation and job creation through the certainty and stability that sensible regulation brings. This also translates into far greater investor comfort knowing that their regulator is engaging with the asset class in a positive way and is implementing protections for their benefit.

The fact that a framework for investor protection and stability within digital assets will soon be in place across the EU is a massive boost for the digital assets sector within Europe. This contrast starkly to the situation in the US where the SEC has taken an openly hostile stance against companies trying to operate legitimately within the space while simultaneously doing next to nothing to actually put in place a functional regulatory framework. The opportunity for Europe to now become the world’s digital assets hub is very clear.”