Only a few days ago it became known that the European Commission had passed the ” Markets in Crypto Assets ” (MiCA). This regulation is intended to define the handling of digital assets and regulate the crypto market at a legal level. With this, the EU wants to create a uniform regulation among all member states. Although it will take some time before the regulation is implemented into applicable law, the first problems are already looming. DeFi projects in particular are even threatened by MiCA.
- New EU regulation could endanger DeFi
- MiCA brings a lot of light and shadow to the crypto world
- The European Union wants to prepare for digital assets
- Summary: new EU regulation could change the DeFi market
1- New EU regulation could endanger DeFi
The “Markets in Crypto Assets” caused quite a mini chaos. The European Commission reacted to the advance of companies like Facebook, whose stablecoin Libra could be a serious competitor for the regulated euro. In many member states, the handling of digital assets, such as cryptocurrencies and funds, is only inadequately regulated. MiCA is to create uniform rules, take action against illegal money laundering, and set standards for companies and issuers. One of the many points of the regulation concerns the place of business of companies that want to operate crypto projects in Europe. The “Markets in Crypto Assets” stipulate that these same companies must also have a place of business in one of the member states. This could be a very big problem, especially for DeFi projects.
As Finahukuk, we examined the impact of MiCA on the crypto market. The effects on stablecoins such as Tether (USDT), USD Coin (USDC) or Facebook’s Libra are not to be despised. Issuers of such “utility tokens” must submit a comprehensive white paper to the responsible financial supervisory authority, comply with certain marketing requirements and have an IT infrastructure based on modern security standards. However, a crucial point is a permanent place of business in a member state of the EU. In many DeFi projects, however, the operators and developers deliberately remain anonymous or act in a decentralized manner. We see a big problem here, as the issuers can only comply with this point of the regulation,
2- MiCA brings a lot of light and shadow to the crypto world
While the regulation of the EU Commission can generally promote investor confidence in the crypto market, there could be far-reaching hurdles for DeFi projects. In the decentralized financial services sector, decentralized companies prefer to provide their projects. Often little or nothing is known about these companies. In an early-stage market like DeFi, in particular, where a large and globally dispersed investor base is quickly reached, the regulation could present a major challenge. “The obligation that issuers of crypto assets must be included in the form of a legal person could pose significant challenges for DeFi projects where the issuance is decentralized and there is no identifiable issuer.”
According to the draft regulation, MiCA could deny EU citizens access to DeFi projects. At least if they do not have the opportunity to implement the legal requirements. We even see the “Markets in Crypto Assets” as a “significant and incompatible regulatory challenge”. It remains unclear whether the decentralized organizations will give up their status of anonymity with the introduction of MiCA and whether the issuers of the tokens can be identified at all.
3- The European Union wants to prepare for digital assets
The move by the EU Commission to regulate the crypto market is no accident. The influence of digital assets, such as Stablecoins and other “utility tokens”, grew tremendously with the rise of digital assets. The EU itself sees its own need for action and wants to become the leading association in the field of blockchain technology. With China and Switzerland, individual countries have already significantly expanded their activities in this area and recognized the advantages of Distributed Ledger Technology (DLT). With the European Central Bank (ECB), an EU body is already working on a “digital euro”, i.e. a digital currency that represents the euro. Such a digital central bank currency should simplify cross-border payments and represent a secure means of payment.
The decision-makers of the European Union had to put up with criticism in the past, in which there was already talk of failure. Private stablecoin projects such as Tether (USDT) and Facebook’s Libra may ultimately have accelerated this area. After initial skepticism, the head of the European Central Bank, Christine Lagarde, was open to a “digital euro”. She warned that the EU should prepare itself so that the connection to private companies and other countries can only be kept through a digital central bank currency. Otherwise, there is a threat of a change in the electronic payments market, which could cause difficulties for the euro. These considerations most likely led to the adoption of the new regulation on the regulation of digital assets.
4- Summary: new EU regulation could change the DeFi market
The EU regulation for the regulation of digital assets, dubbed “Markets in Crypto Assets” (MiCA), could have far-reaching effects. In the decentralized financial services (DeFi) sector, in particular, MiCA could ensure that some projects disappear from the market once they come into force. The ordinance introduces a number of new rules and regulations. Under certain circumstances, these cannot be implemented across the board by all companies.
In principle, clear regulation could bring many advantages and increase investor confidence. In addition, the European Union seems to have recognized the importance of DLT and is striving to take a leading role in this area. At the same time, however, established blockchain companies and market observers criticize the fact that MiCA could significantly limit the market-leading position of many projects in digital payments.