Explained | What is the EU’s new crypto-legislation?

the new legislation approved by the European Union for regulating cryptocurrencies and cryptoassets

The story so far: The European Parliament, the legislative body of the 27-country block European Union, has approved the world’s first set of comprehensive rules to bring largely unregulated cryptocurrency markets under the ambit of regulation by government authorities. The regulation, called the Markets in Crypto Assets (MiCA), will come into force after formal approval by member states.

According to Chainalysis, about 22% of the global crypto industry was concentrated in central, northern and western Europe, which received $1.3 trillion worth of cryptoassets. Having a comprehensive framework like MiCA for 27 countries in Europe not only harmonises the crypto industry but also gives the EU a competitive edge in its growth compared to the U.S. or the U.K. which lack regulatory clarity. More importantly, 2022 saw some of the biggest failures and wipeouts in the crypto industry involving bankruptcies and fraud scandals, be it the collapse of the crypto exchange FTX and its spat with Binance or the failure of Terra LUNA cryptocurrency and its associated stablecoin. The liquidity shortage caused by these shocks led other crypto lending platforms to halt customer transfers and withdrawals before filing for bankruptcy.

As investments and the size of the crypto industry grow, European and other regulators have felt the need to bring governance practices in crypto firms to ensure stability and financial sector-like rout and contagion. European Parliament member Stefan Berger, who is the lead for the MiCA regulation explained that the law will protect consumers against deception and fraud, and “the sector that was damaged by the FTX collapse can regain trust”.

The MiCA legislation will apply to ‘cryptoassets’, which are broadly defined in the text as “a digital representation of a value or a right that uses cryptography for security and is in the form of a coin or a token or any other digital medium which may be transferred and stored electronically, using distributed ledger technology or similar technology”. This definition implies that it will apply not only to traditional cryptocurrencies like Bitcoin and Ethereum but also to newer ones like stablecoins.

Stablecoins are digital tokens that aim to stay pegged in value with a more stable asset — a fiat currency like the U.S. dollar or other stable cryptocurrencies. MiCA will establish new rules for three types of stablecoins — asset-referenced tokens, which are linked to multiple currencies, commodities or cryptocurrencies, e-money Tokens, which are linked to a single currency and utility tokens, which are intended to provide access to a good or service that will be supplied by the issuer of that token.

As for the assets that will be out of MiCA’s scope, it will not regulate digital assets that would qualify as transferable securities and function like shares or their equivalent and other cryptoassets that already qualify as financial instruments under existing regulation. It will also for the most part, exclude nonfungible tokens (NFTs). MiCA will also not regulate central bank digital currencies issued by the European Central Bank and digital assets issued by national central banks of EU member countries when acting in their capacity as monetary authorities, along with cryptoassets-related services offered by them.

MiCA will impose compliance on the issuers of cryptoassets, who are defined as the “legal person who offers to the public any type of cryptoassets”. It will apply to cryptoasset service providers (CASPs) providing one or more of these services — the operation of a trading platform like CoinBase, custody and administration of crypto-assets on behalf of third parties (customers), the exchange of crypto-assets for funds/other crypto-assets, the execution of orders for crypto-assets, the placing of crypto-assets, providing transfer services for crypto -assets to third parties, providing advice on cryptoassets and crypto-portfolio management.