Disclosure: The views and opinions expressed herein are solely those of the author and do not represent the views and opinions of crypto.news editorial.
All the talk is about the EU’s crypto asset market: MiCA, MiCA and MiCA. This regulatory package, which has not yet been fully implemented, is already creating monumental movement in the blockchain and cryptocurrency space. When will they fully take effect, what exactly will the regulations cover, and most importantly, how do you prepare for the upcoming law changes and stay compliant in the brave new world of regulated cryptocurrencies?
First, when? In June 2024, the European Securities and Markets Authority will prepare a draft delegated law together with the European Banking Authority. At the same time, parts of the MiCA regulations fully apply. This part of the package covers asset-referenced tokens, including all real-world asset tokenization tokens and fiat-backed stablecoins, since the assets being referenced are real-world currencies. When that happens, all entities involved in business operations using asset-referenced tokens will have to introduce a number of regulatory measures, such as KYC and AML protocols. The remaining regulations will take effect in December 2024 or January 2025. Regulated entities include:
- Cryptocurrency asset service provider (CASP). Any company that provides services such as exchange, wallet management or custody services for cryptocurrency assets is considered a CASP. When registering new users, you should integrate KYC measures and an AML program that reports suspicious transactions. The problem we need to mention is that many defi are also considered CASPs. MiCA does not apply to so-called “fully decentralized DeFi”. This means that no person or organization, such as Bitcoin, actually profits from the company. However, “partially centralized defi” is considered a CASP.
- Asset Reference Token publisher. These companies are already regulated by MiCA rules and must also introduce KYC and AML measures.
Of course, the obvious answer is to introduce KYC and AML measures to ensure compliance in the EU cryptocurrency market. However, there are many barriers to this process, especially for cryptocurrency companies.
Developing KYC and AML protocols in-house can take months, if not years, and set companies back millions of dollars. The world’s largest banks spend up to $500 million annually on KYC alone, with the average spend being $50 million. Most cryptocurrency companies that already have KYC do this through various KYC providers. Like other B2B companies, KYC providers carry out the entire process, saving customers from having to spend resources on a completely new business process. Current market conditions show that finding a KYC provider is the best option in terms of optimization. Even the biggest names in the industry like Binance, Bybit, and Huobi all use the services of KYC providers instead of managing it in-house.
Another barrier to the cryptocurrency market is data security. Many people come to the cryptocurrency market because of the built-in anonymity features and no need to go through KYC. This is not necessarily because they are financing terrorism or money laundering, but simply because they believe in ownership of their data and do not want to provide sensitive information such as home addresses or identification numbers to third party companies. Explaining the benefits of MiCA rules and KYC/AML practices to specific audiences is not easy, making it a big challenge for cryptocurrency companies to overcome to retain users even after the regulations are fully implemented.
But what are the real benefits of MiCA rules? Why is it being introduced? Is it because the government wants to control us more?
I strongly believe that the MiCA rules will have a very positive impact on the EU cryptocurrency market, allowing it to compete with other regions that are actively introducing cryptocurrency regulation and enable it to become a global cryptocurrency hub.
First of all, MiCA will replace current regulations in various EU countries. Germany, Italy, Spain, France and other countries all have different regulations with travel regulations, minimum size of transactions without KYC and many other differences. This forces businesses to spend additional resources to adapt their KYC and AML processes individually to every single law. For example, Binance had to withdraw from the Dutch market because it was unable to obtain the necessary licenses. The new MiCA rules, which apply to the entire EU, will ensure that cases like this never happen again, as companies will have to adhere to unified standards, making operating within the EU cryptocurrency market much easier and cheaper.
Another important thing to note is that MiCA prohibits things that are clearly dangerous and economically unstable. One of the biggest changes this regulation will bring is a complete ban on algorithmic stablecoins. Simply put, there are two types of stablecoins: currency-backed and algorithmic. Currency-backed stablecoins lock funds at a 1:1 ratio, ensuring stable prices. This means that if there is 1,000,000 USDT on the market, Tether will lock up 1,000,000 USD somewhere and promise to buy back all of that currency with the locked funds.
On the other hand, algorithmic stablecoins use supply and demand market principles to maintain target prices. When an issuer sees that the value of a stablecoin is falling, it purchases a portion of the supply with other tokens. Once it gets large enough, the collateral tokens used to purchase stablecoins from the market will also start to lose value, or the company will run out of collateral tokens, ultimately preventing the company from taking enough stablecoins from the market. Both tokens collapsed. This is the case for UST and LUNA, the price of LUNA has fallen 99.99%. Algorithmic stablecoins do not work, and by banning them outright, MiCA regulations better protect investors’ funds.
Many in the cryptocurrency industry are less optimistic about the upcoming regulations and have their own arguments. Implementing KYC and AML protocols will definitely increase the operating costs of cryptocurrency companies, and users will end up paying for them. Hiring a KYC provider, storing all that data, and many more additional processes is expensive, forcing companies to cut costs elsewhere or increase fees and commissions.
Another thing to mention is security issues. No hacking or leaks happen without your data. Many users are concerned about their privacy, claiming that even traditional financial institutions that have maintained KYC for decades are still falling victim to hacking.
I believe that while these issues are very serious, they will be alleviated and resolved as the cryptocurrency market matures and processes are improved and tested. Fair and clear regulation is clearly the future of the cryptocurrency market, and 2025 will be an incredibly challenging and exciting year for all cryptocurrency users.