by David Attlee, Coin Telegraph:
By the time MiCA makes it through the EU, will it be enough to effectively regulate the crypto industry on the continent?
The final vote on the European Union’s much-awaited set of crypto rules, known as the Markets in Crypto Assets (MiCA) regulation, was recently deferred to April 2023. It was not the first delay — previously the European lawmakers rescheduled the procedure from November 2022 to February 2023.
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The setback, however, was caused solely by technical difficulties, and thus, MiCA is still on its way to becoming the first comprehensive pan-European crypto framework. But that will happen only in 2024, whereas during the second half of last year, when the MiCA text had already been mostly written, the industry was shaken with a number of shocks, provoking new headaches for regulators. There’s little doubt that in an industry as dynamic as crypto, the whole of 2023 will bring some new hot topics as well.
Hence, the question is whether MiCA, with its already existing imperfections, could qualify as a truly “comprehensive framework” a year from now. Or, which is more important, will it for an effective set of rules to prevent future failures akin to TerraUSD or FTX?
These questions have certainly appeared in the mind of the president of the European Central Bank, Christine Lagarde. In November 2022, amid the FTX scandal, she claimed “there will have to be a MiCA II, which embraces broader what it aims to regulate and to supervise, and that is very much needed.”
Cointelegraph reached out to a range of industry stakeholders to know their opinions on whether the Markets in Crypto Assets regulation is still enough to enable the proper functioning of the crypto market in Europe.
EU DeFi regulations still a ways off
One main blindspot with regard to the MiCA is decentralized finance (DeFi). The current draft generally lacks any mention of one of the later organizational and technological forms in the crypto space, and it surely could become a problem when MiCA arrives. That certainly drew the attention of Jeffrey Blockinger, general counsel at Quadrata. Speaking to Cointelegraph, Blockinger imagined a scenario for a future crisis:
“If DeFi protocols disrupt the major centralized exchanges as a result of a broad loss of confidence in their business model, new rules could be proposed to address everything from money laundering to customer protection.”
Bittrex Global CEO Oliver Linch also believes there is a global problem with DeFi regulation and that MiCA won’t make an exception. Linch said that that DeFi is inherently unregulatable and, to some degree, even a low priority for regulators, as the majority of customers engage in crypto mainly through centralized exchanges.
However, Linch told Cointelegraph that just because regulators can supervise and engage with centralized exchanges most easily doesn’t mean there isn’t an important role for DeFi to play in the sector.
The lack of a distinct section dedicated to DeFi doesn’t mean it’s impossible to regulate. Speaking to Cointelegraph, Terrance Yang, managing director at Swan Bitcoin, said that DeFi is to some degree transferable to the language of traditional finance, and therefore, regulatable:
“DeFi is just a bunch of derivatives, bonds, loans and equity financing dressed up as something new and innovative.”
The yield-bearing, lending and borrowing of collateralized crypto products are things that investment and commercial banks are interested in and should be regulated similarly, Yang believes. In that way, the suitability requirements as formulated in MiCA can actually be helpful. For instance, DeFi projects may potentially be defined as providing crypto asset services in MiCA’s vocabulary.
Lending and staking
DeFi may be the most notable, but surely not the only limitation of the upcoming MiCA. The EU framework also fails to address the growing sector of crypto lending and staking.
Given the recent failures of the lending giants, such as Celsius, and the rising attention of American regulators to staking operations, EU lawmakers will need to come up with something as well.
“The market collapse in the last year was spurred by poor practices in this space like weak or non-existing risk management and reliance on worthless collateral,” Ernest Lima, partner at XReg Consulting, told Cointelegraph.
Yang noted the particular problem of disbalance in the regulation of lending and staking in the Eropean Union. Ironically, at the moment, it is the crypto market that enjoys an asymmetrical advantage in terms of loose regulation when compared to the traditional banking system in Europe. Legacy commercial or investment banks and even “traditional” fintech companies are overregulated relative to the arguably heavily under-regulated crypto exchanges, crypto lending and staking platforms: