Hi all,

A semi-famous saying goes: The US innovates, the EU regulates. That’s true for a lot of markets, and now it’s touching blockchains and cryptocurrencies.

It’s particularly interesting for an industry that is famous for aiming at decentralisation outside of any government influence.

So what’s up?

The European Parliament adopted the so-called MiCA regulation earlier this year. We’ll explain broadly:

• What does it actually mean?

• How did MiCA come about?

• What does it mean for the future?

Let’s get started! 🤓

New regulations adopted by the European Union usually have wide-ranging impacts but they are rarely fun to read about. Despite the catchy abbreviation, MiCA – which stands for 'Markets in Crypto-Assets' – is no exception. Looking at the developments that led to MiCA is pretty interesting though.

What are we actually talking about?

In April 2023, the European Parliament adopted MiCA as the first of its kind. Some countries have regulated specific aspects related to cryptocurrencies or blockchain technology but the EU now has the first supranational legislation in the world (you can read it all here). Naturally, EU officials are hoping that they are leading the way for other jurisdictions.

In a nutshell, MiCA applies to a broad range of assets that are defined as 'a digital representation of a value or of a right which may be transferred and stored electronically, using distributed ledger technology or similar technology'. Sounds complicated? That's because the definition has to be applicable to future developments as well.

As a rule of thumb, MiCA covers cryptocurrencies which are represented by tokens on a blockchain, just like a regular currency like the Euro is represented by coins and banknotes.

If you exchange a 10 Euro note for five 2 Euro coins, you add weight to your wallet but the value remains the same. The same is true for exchanging one bitcoin for one bitcoin, with the exception that you're then dealing with a cryptocurrency which has not been issued by a central bank.

You can also create other tokens on a blockchain which are not all the same. These are called non-fungible tokens or NFTs.

An NFT could be digital art, but it can also be directly linked to the real world like a ticket to a Premier League football game. You can sell art or the ticket or you could exchange it for another item of the same value (e.g. a ticket for a seat in the same price category), but you end up with something slightly different.

NFTs are not within MiCA's scope. Neither are some other recent innovations which is why there are already questions around a need for 'MiCA 2.0' (which is not being discussed by EU bureaucrats at the moment).

How did we get here?

Writing a regulation covering hundreds of pages and getting agreement from EU member states – as well as different parts within the EU bureaucracy – takes some time. In the case of MiCA, work started in 2018. At the time, Bitcoin had just made lots of headlines due to a ten-fold price increase between May and December 2017.

Moreover, the first rumours about Facebook planning its own cryptocurrency started to emerge in May 2018. This project – then named Libra – was officially announced in June 2019.

While the details of the Libra projects are more nuanced, the takeaway for decision-makers was: A tech giant with billions of users worldwide wants to introduce its own currency. Saying that this caused some regulatory concerns would be a mild understatement.

For the EU, it was therefore time to act. Negotiations took some time – the Covid-19 pandemic probably led to some delays as well – but an agreement was finally reached by June 2022. The EU Parliament still had to approve which required translating the entire regulation into all EU languages, another time-consuming effort.

MiCA was finally published in the Official Journal of the European Union on 9 June 2023. On this date, the timeline for the follow-up efforts started.

What’s next?

As far as regulation goes, MiCA has been received very well. However, that's only the groundwork. The next step is implementation – and nobody really knows what to expect.

Various EU authorities that are involved with financial regulation will have to develop technical measures to regulate day-to-day activities within the industry. These are based on public consultations. The first package was published in July, two more packages are scheduled to follow by October and early 2024 respectively.

Summary

The regulation set out in MiCA will only start to become applicable in 2024 (for some aspects as late as December 2024). While that seems like a lifetime in the tech space, any reputable company should take the regulation already into consideration.

This is an ironic situation. The entire industry was kickstarted by the Bitcoin movement which wanted to separate money from the state. While blockchains and cryptocurrencies can't really be described as mainstream today, regulation is necessary to achieve that.

Whether such regulation will encourage or stifle innovation, however, remains to be seen. This will largely depend on the actual implementation measures which are set to be published in the coming months.

That’s the end for today! 😢