The European Council approves the MiCA

Yesterday the European Council approved the so-called MiCA, or Markets in Crypto-Assets regulation.

This approval does not yet mark the final entry into force of the regulation, but it does mark the approval of what should be the final text. 

Indeed, in order to be finally passed, it will need to receive further approval, this time from the European Parliament, expected next week. However, since the text of the new regulation should by now be the final one, it is already possible to reason about it. 

How does MiCa’s approval process look?

If, as seems likely, the European Parliament also approves it, the text should be published in the EU Official Journal early next year, entering into force definitively. However, further details will be needed to understand how these rules will be concretely applied on crypto service providers. 

After approval, the text will need to be translated into more than 20 official EU languages before being published in the Official Journal. In addition, there is an adaptation period of 12 to 18 months to prepare for the entry into force of the new laws, which then are not likely to come into concrete effect until early 2024. 

The European Council should not be confused with the European Commission, because it is a collective body that directly includes the heads of state or government of the EU member states, as well as the President of the European Council itself and the President of the European Commission. 

The specific task of the European Council is to dictate general guidelines to the other bodies of the European Union, but they have a wide margin of discretion in implementing them.

Hence it is an institution without legislative power, so yesterday’s approval does not at all constitute the entry into force of the new regulation for crypto markets. 

Instead, this is up to the European Parliament, which is an elective body with legislative power. 

As the official communiqué states, with yesterday’s approval “the Permanent Representatives’ Committee meeting of 5 October 2022 which endorsed the final compromise text.”

Since the European Parliament has the actual legislative power in the EU, in theory, it could also reject this text, or approve a modified version, although at this point it seems more likely that it will be approved, since it has been in the works for several months now. 

How the MiCa works

Formally, the MiCa is a regulation of the European Parliament and Council on cryptocurrency markets that amends EU Directive 2019/1937. It is about 380 pages specifically dedicated to regulating crypto markets in European Union countries. 

Many European crypto traders seem to favor its entry into force, because it finally establishes a clear legal perimeter within which they can operate. 

However, there are some doubts about its real effectiveness, particularly in relation to what is established on non-euro-denominated stablecoins and KYC.

The fact is that even in Europe, the absolute most widely used stablecoins are those based on the US dollar, with those based on the euro having absolutely marginal use. Restricting the use of dollar-based stablecoins in the EU could hurt many European users of crypto markets. 

In reality, the aspect that is causing the most buzz is that of mandatory KYC for those providing crypto services. In fact, there are many decentralized services for which it is simply not really technically possible to do KYC, which is the verification of the personal identity of users. 

It is worth mentioning that the MiCA regulation applies to crypto service providers, i.e., those companies or organizations that act as intermediaries. Therefore, a user who downloads a non-custodial wallet, for example, and uses it to send and receive cryptocurrencies in P2P mode, i.e., directly between users and without intermediaries, does not fall under the category of entities to which this regulation applies. 

All companies and organizations that will provide crypto services as intermediaries will be forced to verify the identity of all their users, including that of the owners of the wallets to which tokens are sent from their platforms. 

It will actually be necessary for users to verify that they are the real owners of the external wallets used for deposits and withdrawals, and it will become very difficult to be able to use wallets belonging to others for deposits and withdrawals. Basically, the procedures for deposits and withdrawals to and from external wallets will become slightly more complicated, but will always remain possible. 

After the publication of the news of the approval of the MiCA regulation, the crypto markets reacted negatively, but only slightly and for a very short period, because they recovered within only a couple of hours. 

According to some leading figures in the mainstream financial world, regulation of crypto markets could in the long run do a lot of good for this market, because it could allow the entry en masse of those institutional investors who cannot or do not want to operate in markets that are not fully regulated. Although Europe is certainly not the leading market for cryptocurrencies, it still ranks third after America and Asia, with some of the largest financial institutions in the world. 

The fact that it is the crypto markets that are regulated, and not the cryptocurrencies themselves, allows for the ability to continue to use them in a decentralized way, if desired, but at the same time allows for a clear and serious regulatory framework if one opts instead to use intermediaries, such as the major centralized exchanges.