MiCA’s impact on the EU crypto industry - harmonisation, competitiveness, institutionalisation, and market share gains for regulated businesses.

For the EU crypto industry, the Markets in Crypto-Assets Regulation or short MiCA, represents a true game changer. Up until now, crypto companies in the EU had to knock at every single national regulator’s door if they wanted to serve the entire EU market.

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Some countries like Germany, Austria or France have already had dedicated crypto licensing regimes in place, others like Ireland have created simple AML registration obligations, and again others didn’t have any regulatory frameworks in place for crypto businesses. Navigating the complex national regulatory patchwork of 27 different rulebooks became a very costly and burdensome endeavour, which is why most crypto businesses weren’t able to address the EU market as a whole.

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Undoubtedly, this has constrained the growth of EU startups, and limited their competitiveness vis-a-vis their US or Asian counterparts. Under MiCA, the same binding EU requirements will apply to all 27 member countries, plus the additional 3 countries (Norway, Iceland, Liechtenstein) of the European Economic Area (EEA). Once a company has been granted a MiCA license in one country, it will be able to “passport” it and offer the licensed service throughout the entire EEA market spanning across 30 European countries.

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Once MiCA enters into application, offshore, unregulated companies will no longer be able to target EU consumers pro-actively. The draft reserve solicitation guidance from the European Securities and Markets Authority (ESMA), i.e. the rules under which foreign businesses can onboard EU customers that act on their exclusive, own initiative, are very narrowly framed and cannot be exploited to bypass MiCA. This will lead to MiCA-regulated crypto businesses gaining significant EU market share from their offshore, unregulated competitors.

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Plus, MiCA will, in all likelihood, lead to more institutional adoption and activity in the EU crypto market. According to Bloomberg, only 4% of institutional funds in Europe have exposure to crypto-assets. Regulatory uncertainty is one, if not the main, concern holding institutions back from entering the space. I expect major European banks will roll-out crypto-asset services in the next 24 months, be it custody, exchange, or the issuance of e-money tokens (EMTs) or asset-referenced tokens (ARTs), colloquially referred to as stablecoins. First-movers such as Societe General in France or Germany’s second largest bank DZ Bank are only the vanguard of a larger trend towards institutionalisation that will continue to intensify.

To sum up, I expect MiCA to increase harmonisation, the competitiveness and market share of regulated businesses and the institutional share of activities and services provided.

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The creation of regulatory clarity amidst global uncertainties could very well attract capital, talent, and companies, especially those looking to issue tokens, from the rest of the world. In the best case, crypto as an industry could become a huge opportunity for an economic and technological revival of the EU.

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However, much of MiCA’s practical success boils down to the implementation standards and enforcement practices that are currently being developed by the EU supervisory authorities.
Some MiCA passages carry the risk of burdening industry participants, and their full effects will only become apparent once final technical implementation standards provide practical operational guidelines. As one example, the extensive disclosure requirements and liability provisions for trading platforms could disincentivize market participants from seeking to build a MiCA-compliant trading platform. This could lead to an EU crypto-market with many exchanges and brokers who largely rely on offshore, unregulated trading platforms for their liquidity.

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The worst case scenario is one where only a minority of EU crypto startups would manage to shoulder the substantive legal and compliance costs of providing MiCA-compliant services or issuing a token, and both large trading platforms and some large global stablecoins remain outside of MiCA’s perimeter. EU consumers could be cut off from innovation and the largest pools of global liquidity and utility.

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Furthermore, there's a possibility that regulators might determine the majority of NFT and DeFi projects to fall under MiCA's jurisdiction, necessitating compliance—a decision still subject to MiCA recitals' interpretation. Such a scenario could ultimately prompt the relocation of teams and resources outside of the EU.

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MiCA could represent a positive boost for EU crypto businesses and the EU economy overall, but its success is highly dependent on the finalisation of workable technical standards and their practical implementation by EU supervisors.

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MiCA’s global impact - will MiCA set global standards?

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Essentially, the same can be said for MiCA’s global impact. MiCA’s potential to become for crypto what GDPR is today for privacy, an almost globally adopted regulatory standard, is certainly there, but far from a foregone conclusion.

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Undeniably, MiCA will play a huge role in how other jurisdictions, especially those without much experience in financial regulation and supervision, will think about their own crypto-asset frameworks. A closer look into the FSB (Financial Stability Board) recommendations for crypto service providers and so-called “global stablecoin arrangements” reveals the significant influence thatMiCA concepts have on global standard setting bodies.

The EU market is the single largest internal market in the world with 450 million relatively wealthy consumers. By the sheer size of its market, MiCA could persuade many companies around the world to adapt MiCA operating standards, possibly even on an international scale in order to maintain globally streamlined operations and products. The global impact of EU regulatory standards has been observed in a number of industries, from the chemical industry to agriculture or tech, and coined as the “Brussels effect” by Columbia Law School Professor Anu Bradford.

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Indeed, U.S. CFTC Commissioner Caroline Pham cautioned that “as the U.S. struggles to provide regulatory clarity to the domestic crypto industry, global regulatory frameworks like MiCA could fill the gap.”

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The longer the US regulatory vacuum for crypto-assets persists, the greater I expect the global impact of MiCA standards to be.

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However, as outlined above, it is only MiCA’s practical success that will matter at the end of the day, and much of that work still needs to be finalised and subsequently translated into a pragmatic supervisory practice. If MiCA proves to be workable for the industry, consumers and regulators alike, it will have a profound global impact. If not, many jurisdictions will look towards alternative policy approaches.

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Only time and the market will tell.

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Undoubtedly, the first 12-24 months of MiCA entering into application will be a bumpy road with practical problems arising from both the industry and the supervisory practice. These problems will need to be addressed by regulatory guidance, or, if more consequential, they need to be incorporated into the next MiCA review that will introduce changes to the “level one” regulation itself. The first MICA interim review is due in 1.5 years, and I expect it will focus substantially on operational challenges with respect to the ARTs & EMTs, particularly for issuers of global tokens.

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MiCA is a long-term project that will be specified, amended and improved as market participants adapt to the new regime. Its phased application—beginning this June for stablecoins and extending to December 2024 for all other aspects—signals the start of an extensive journey. There is a unified commitment amongst policymakers, regulators and the industry to ensure the success of what is poised to be the most comprehensive regulatory framework seen on a global scale to date.

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It represents a huge economic opportunity for the entire region, an opportunity that both public and private stakeholders should seize and collaborate on

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