MiCA is one step closer

Last Thursday, a provisional political agreement was reached in Europe on MiCA: ??????Regulation on Markets in Crypto Assets?? ?????. This regulation is intended to regulate the bitcoin sector and has direct effect in all member states of the European Union (EU). Although MiCA will probably only come into force in (June/July) 2024 at the earliest, MiCA 2.0 is already being discussed. But what kind of impact will MiCA actually have for the sector?

In short, MiCA is creating a common regulatory framework for the bitcoin industry. This means that there will be rules for the issuance of crypto assets (for example, a mandatory publication of a white paper). Brokers and exchanges (crypto service providers) and providers of stablecoins (issuers) will be subject to a licensing regime (instead of a registration regime) and rules will be introduced to protect consumers and prevent market abuse.

The proposal, on which a provisional political agreement has now been reached, has not yet been made public. In terms of content, therefore, very little can be said about the regulation itself. However, based on the most recent public version of MiCA, we can say that there may still be some hot issues that could take the industry by surprise.

Keeping bitcoins

Custody and management of crypto assets (bitcoins) on behalf of third parties. Pursuant to article 67 paragraph 7 MiCA, crypto service providers must separate the assets of their customers from their own funds. This means that customers’ assets are protected in the event of bankruptcy. In the Dutch bitcoin sector, customer assets are often placed in a foundation (third-party funds), including BL3P, Bitonic’s bitcoin exchange.

So far nothing crazy. However, if we look further at Article 67 paragraph 8 MiCA, we notice something. Pursuant to this article, bitcoin companies that hold bitcoins for their customers are liable for the loss of bitcoins due to malfunctions or hacks up to the market value of the lost bitcoins.

We do not find any grounds for exception in article 67 paragraph 8 MiCA. These are cases when a company is not liable. You can think of external events that led to the malfunction or hack that the company cannot do anything about.

The lack of grounds for exception is remarkable. These are often included, so that one does not have to fall back on the legal (general) rules of force majeure. This is somewhat problematic, as regulators may require bitcoin companies to cover these risks (of losing customers’ bitcoins) with insurance or equity capital, which entails higher costs.

Hopefully we will find grounds for exceptions in the final version of MiCA, otherwise the thresholds for managing bitcoins for their customers may be too high for some (non-wealthy) bitcoin companies.

Ban on bitcoin

A few months ago there was a lot of speculation about a ban on bitcoin. Two groups in the European Parliament, the Greens and the Progressive Alliance of Socialists and Democrats, submitted an amendment to ban large-scale ‘environmentally unfriendly consensus mechanisms’ in Europe.

This referred to the consensus mechanism of bitcoin: ??????Proof of Work???????. Fortunately, the European Parliament’s Committee on Economic and Monetary Affairs (ECON) rejected the amendment and there was no (implicit) ban on bitcoin.

Ernest Urtasun, a member of the Greens, expressed disappointment last week about this, but said that a compromise had been reached on sustainability criteria. ESMA, the European Securities and Markets Authority, should develop criteria that classify consensus mechanisms based on the negative impact on climate and environment. The review clause in MiCA should introduce sustainability standards for consensus mechanisms once the regulation is updated within 48 months. The danger of a ban on bitcoin has therefore not gone away forever.

MiCA 2.0

MiCA’s provisional political agreement still needs to be approved by the ECON Commission and the European Council (followed by a plenary session) before MiCA can actually enter into force. Still, Christine Lagarde, President of the European Central Bank (ECB), called for MiCA 2.0.

Crypto-Assets and DeFi have the potential to pose a real risk to financial stability. Christine Lagarde (President of the European Central Bank)

MiCA 2.0 should fill in the gaps in MiCA. For example, according to ECB president Lagarde, there should also be rules for staking , lending , DeFi and assets without an identifiable issuer. Is she perhaps referring to bitcoin with the latter? Time will tell.

Want to know more about MiCA? Read it here.

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