Odaily Frontline | What impact will the EU's proposed new encryption regulation MiCA have?

This article comes fromCointelegraph, Original Author: KIRILL BRYANOV

Odaily Translator |

Odaily Translator |

There is a "metaphysical" phenomenon in the encryption field-autumn is often an active season for regulators, and 2020 is no exception. Tensions on both sides of the Atlantic: Markets are still reeling from the “U.S. Commodity Futures Trading Commission (CFTC) accusing derivatives trading platform BitMEX” event, and the British financial regulator – the Financial Conduct Authority (FCA) has also taken action to ban retail investors Investors use cryptocurrency derivatives.

The far-reaching framework aims to provide regulatory clarity for digital financial businesses serving EEA residents. As far as the encryption field is concerned, the stablecoin and DeFi fields are destined to be particularly significantly affected. These two fields are interconnected and have dominated the crypto industry for most of 2020.

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Threats to Stablecoins

Currently, the draft, dubbed “Regulation on Markets in Crypto-assets (MiCA),” is a proposal put forward by the European Commission, the EU’s executive arm. It also has to go through a fairly lengthy legislative process before it becomes law, meaning it could take months or even years for new regulations to take effect.

The draft makes it clear that stablecoins (also referred to in the document as "asset-referenced tokens" and "e-money tokens") have been a primary area of ​​focus for European lawmakers: MiCA specifically carves out such assets and provides It provides a bespoke regulatory framework.

Under the proposed law, stablecoin issuers would have to be incorporated as a legal entity in an EU member state. Other requirements include provisions related to capital, investor rights, custody of assets, information disclosure and governance arrangements.

Albert Isola, Gibraltar’s Minister of Digital and Financial Services, explained to Cointelegraph that the European Commission’s heightened focus on stablecoins stems from its concerns about the financial stability of the eurozone:

“Stablecoins are widely considered to have potentially large benefits as a digital payment method, offering greater financial inclusion and a more efficient method of transferring funds. But they are also seen as potentially beneficial to financial stability and integrity.” risks, which could weaken the effectiveness of monetary policy. It seems logical that the EU might not welcome the electronic issuance of euros by entities other than the European Central Bank.”

Isola mentioned “disruptors,” such as the future stablecoin Libra, that have the potential to significantly decentralize control of the currency.

“The market capitalization of USDC alone has grown by 250% in 2020, from $520 million to $1.86 billion, and the pace of growth has accelerated significantly in the past two months. The space in the space is still relatively small, but it has the potential to have a huge impact on regulated banks and payment institutions."

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The Threat From Libra

The extent to which top EU officials are concerned about maintaining the bloc's monetary sovereignty is illustrated by the fact that in early September, "the finance ministers of Germany, France, Italy, Spain and the Netherlands issued a joint statement outlining the stability of the Coin business should stop before it is legal," said Konstantin Richter, CEO and founder of blockchain infrastructure company Blockdaemon, "regulatory and supervisory challenges are already being addressed."

Richter added that some powerful officials in European financial policy, such as German Finance Minister Olaf Scholz, have advocated the introduction of the regulatory framework.

Most of the experts interviewed by Cointelegraph cited Facebook-backed Libra as the starting point for the European Commission to think about the risks and opportunities associated with stablecoins.

MiCA began with an explanatory memorandum discussing that the cryptoasset market remains small and does not pose a serious threat to financial stability; however, frameworkers acknowledged that this could change with the advent of “global stablecoins” . These stablecoins seek wider adoption by incorporating features designed to stabilize their value and by leveraging the network effects created by the companies that facilitate these assets. "To date, there has been one stablecoin project that falls within the scope of this description: Libra.

Mattia Rattaggi, chairman of the board of directors of FICAS AG, a Swiss encryption investment management company, believes that stablecoins are the application of blockchain technology and have the greatest probability of impact. Regulators are very clear about this:

To further hedge against the potential disruption of stablecoins to monetary stability in the euro area, the MiCA proposal imposes stricter compliance requirements on issuers of stablecoins deemed “significant”. Materiality criteria include customer base size, market capitalization, transaction volume, and even “the importance of the issuer’s cross-border activities and interconnectedness with the financial system.”

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Bad news for DeFi?

Stablecoins have largely fueled another expanding area of ​​crypto-financial activity: the wide variety of applications and protocols that exist under the DeFi umbrella. Given the stringent proposed requirements for stablecoins, one can imagine how complicated things could become if a majority of the liquidity locked in a DeFi protocol was denominated in non-MiCA-compliant stablecoins.

Another major source of uncertainty is the requirement for all crypto asset service providers (CASPs) seeking authorization to operate in the EU to be legal entities with offices in one of the member states. It remains an open (and centralized) question whether European authorities will consider individual DeFi applications to be CASPs, but if so, development teams maintaining DeFi protocols may be forced to come up with workarounds, which could be dramatically reduced. Dilute the concept of "decentralization".

In response to the proposed regulations, members of the International Association for Trusted Blockchain Applications expressed concern that MiCA could effectively prevent European residents from participating in the DeFi market.

Martin Worner, chief operating officer and vice president of blockchain tools provider Confio, believes that compliance issues can be addressed by implementing on-chain governance mechanisms tailored to jurisdiction-specific regulatory frameworks:

“(This can) be achieved within a self-sovereign framework where institutions can develop compliant DeFi tools that operate within their jurisdictions. Just as there are businesses in different jurisdictions and how they move across borders. Just as different rules apply, the same rules will apply to blockchains.”

Elsa Madrolle, international managing director of blockchain security firm CoolBitX, told Cointelegraph that the DeFi landscape may have changed by the time MiCA became law, just as ICOs changed quickly after their initial boom. At that point, “the requirements for DeFi projects to do business in the EU or find EU customers will be very clear.”

Madrolle believes that by then, DeFi projects will fall into two categories: regulated and non-regulated, and the big question is whether the rest of the world will align with the European framework.

Regulatory and policy firm XReg Consulting recently published a breakdown of the proposed regulatory framework. It believes that the European Commission's newly proposed cryptocurrency regulations pose specific risks to the DeFi industry. The MiCA regulation stipulates that issuers of crypto assets must operate crypto services in the EU as a legal entity. In an Oct. 5 report, XReg noted that this particular requirement could represent a significant challenge for DeFi projects, as the issuers of DeFi tokens are “sometimes unrecognizable.” XReg states that MiCA generally promotes consumer and investor protection, market integrity and financial stability. However, the DeFi industry may end up encountering “significant, irreconcilable regulatory challenges and possible problems, at least in Europe.”

At the same time, XReg Consulting partner Nathan Catania hopes that regulators can preserve the existence of DeFi while implementing the new MiCA regulations: "I think that a project that is sufficiently decentralized and does not provide services to third parties on a professional basis cannot be regarded as For CASP, there is still room for DeFi projects.”