EU Starts to See the Unintended Consequences of Crypto Regulation 

The European Union has been praised for its proposed bill to regulate crypto assets, the Markets in Crypto-assets directive (MiCA), as it was an ambitious attempt to create a new regulatory framework for all unregulated crypto-assets. When Europe proposed it in 2020, it was the first of its kind — but almost two years later, it is still waiting for a Parliamentary vote, which was supposed to happen last Monday but was delayed at the last minute. 

The reason to push back this long-awaited vote was to avoid a possible misinterpretation of some provisions that could ban the use of cryptocurrency that use proof-of-work to validate transactions. This would include the two most popular cryptocurrencies, bitcoin and Ether.  

While some European countries have raised environmental concerns related to the use of proof-of-work crypto assets, the initial goal of MiCA is not to prohibit any type of coin. Stefan Berger, the rapporteur in charge of preparing the report for the European Parliament, said on Twitter that “it is central for me that the MiCA Directive is not misinterpreted as a de facto bitcoin ban.” 

There isn’t a new date yet for the vote — but if this is the only outstanding issue, we could see a new vote scheduled for the end of March or beginning of April.  

Read more: EU Pressed to Accelerate Crypto Frameworks vs AML, Sanctions Evasion 

Regulating or banning more activities than the text originally intended is one of the risks that stems from the 168-page MiCA document. But there are other areas that could also be reviewed or amended, considering the recent developments in the crypto industry. 

One activity that is heavily regulated is stablecoins. The proposal, drafted in 2019 and presented in 2020, seems to be driven by the fears of a systemic risk posed by Facebook’s stablecoin Libra, now extinct. MiCA is proposing to create a new ad hoc regulation for stablecoins, which is not necessarily a bad thing — but the requirements and prohibitions established in the law make it very difficult, or even unattractive, for stablecoin issuers to create or trade stablecoins in Europe. 

First, MiCa establishes that, “in the EU, no stablecoins can be offered to the public or admitted to trading on a trading platform for crypto-assets, unless the issuer is authorized in the EU and publishes a ‘white paper’ approved by the national competent authority (NCA).”

Second, the proposal also establishes conduct obligations for stablecoin issuers. It lays down rules and requirements for potential marketing communication and ongoing information obligations, such as the obligation for issuers to establish a complaint-handling procedure. Further requirements would mean issuers would have to comply with rules on conflicts of interest; notification of changes in their management body to the competent authority; governance arrangements; own funds; the reserve of assets backing the asset-referenced tokens (i.e. stablecoins); and on the custody of the reserve assets.  

Third, issuers have to invest the reserve assets only in assets that are secure and low risk, and to disclose the rights attached to the asset-referenced tokens. It further prohibits stablecoin issuers and crypto-asset service providers from granting interest to holders of asset-referenced tokens, which may translate as a ban for practices such as yield farming or staking.  

This last prohibition is another example of regulation that may be further analyzed as it may conflict with other policies like central bank digital currencies (CBDCs). Interest-bearing accounts for stablecoins may be a good option to complement CBDCs, which aren’t likely to grant any interest, and could avoid funds flying from commercial bank accounts to CBDC when consumers perceive a higher risk for their deposits.  

MiCA was drafted when private stablecoins were seen as unregulated products which could pose significant systemic risk for the financial system. Two years later, central banks and governments seem to see stablecoins as a more manageable risk if properly regulated. Thus, regulations should strike the right balance between mitigating or eliminating this risk, and providing a framework to create and issue stablecoins.