24/05/2023 Alexander

What does MiCA cover?

Pawel Kuskowski talks to Magnus Jones, the Nordic Blockchain & Innovation Lead at EY Tax & Law about MiCA. Magnus started in the Norwegian blockchain department of EY back in 2015 when EY serviced blockchain from a tech perspective offering company structuring, legal agreements, white paper reviews, smart contract audits, hiring of fraud forensic investigators, interpretation and classic auditing and bookkeeping.

Introducing MiCA

The European Union (EU) Parliament approved the Market in Crypto Assets Regulation (MiCA) on the 20th of April 2023 which forms part of the broader EU digital financial package including the Digital Operation of Resilience Act and the EU Regulation on a pilot regime for market infrastructures based on distributed ledger technology.

Magnus acknowledges that currently, momentum is high for EU regulations in terms of crypto and MiCA is picking up on that momentum. However, MiCA was not meant to regulate the current market as it arose out of the Initial Coins Offering (ICO) market in 2017. This period was when the initial steps were taken and in August 2018, the first proposal was made in favour of a regulation for crowdfunding and ICOs specifically. At that time, interpretation of ICOs was way too complex but even then, the regulators were trying to make a framework which can be compatible with the ever evolving technologies used in blockchains. However, Magnus mentions that we are still far away from having MiCA set in stone. Currently, it is just going ahead as a workable framework similar to those implemented in Singapore or Switzerland.

MiCA will create a better level of certainty for banks and financial institutions who want to offer services or products with regards to crypto because they will feel more secure and assured.

The Transfer of Funds Regulations (TFR)

The Transfer of Funds Regulations (TFR) was adopted on the same day as MiCA. This requires crypto operators to identify their customers which will lead to increased costs.

Regardless, Magnus points out that it is crucial to find a balance because a lot of exchanges immediately want to be compliant in order to stay ahead and prepared. With new regulations introduced recently, it is important to understand how fast we are applying these rules to customers and their transactions. Magnus reminds us that everything in this landscape is traceable so it is down to how you implement it, whether or not you should be able to identify the person per se, or just be able to stop the transactions from taking place.

Adoption journey

Initially, people may feel forced to follow these new regulations adopted by the EU. However,  they will in time feel accustomed to the cost. It will protect the vulnerable consumers, professional customers and ensure financial stability in the markets as well as drive innovation. The important thing is that these regulations are appropriate for the consumers and the industry in that the industry will not be tempted to leave the country in order to sell their products elsewhere. However, Magnus says that even with the initial problems, the TFR is likely to lead to increased transparency but it should be kept separate from KYC and Know Your Transaction (KYT).

Watch the whole discussion:

Are we not able to comply?

The Decentralised Financial (DeFi) market has been very worried lately about the fact that they are not able to comply. From Magnus’ perception, all the firms that his company has dealt with want to be compliant, whether or not they are DeFi. They want to pay taxes, employee fees and implement all regulations correctly, but they need to find a balance towards their market so it is very much about the timing.

A few years ago, when the Financial Action Task Force (FATF) gave their crypto guidance, companies were advised to conduct full AML and KYC checks on all people dealing with DeFi products. Estonia was the first country to adopt this a day before Christmas Eve, and following this, several startups wanted to be established in Estonia. 

A foreseeable shift

Magnus implies that a shift in the market is foreseeable where serious actors will set the finance system of the future by applying different verification mechanisms for KYT. As MiCA comes into play, institutional investors will now have a framework through which they can legally invest in crypto assets. If they are using a DeFi mechanism and have invested in a DeFi Token (whether or not a governance token or other specific token relating to DeFi), whether they are a professional investor or a private investor, they are using an accountant or bookkeeper or auditor who will check where these tokens are originating from. If they are AML compliant, they will label those tokens as acceptable and otherwise, illicit. For these kinds of purposes, the volume of the DeFi market is going to increase from 500,000 users to many more across the globe.

Comparison to Markets in Financial Instruments Directive (MiFID) and Market Abuse Directive (MAD)

Pawel thinks that MiFID has been a complete failure since it did not create anything that it was supposed to create like better transparency, better financial market or better secondary markets. This raises the question if MiCA is headed the same way as it is very similar to MiFID. 

Magnus agrees and states that the first proposal for a regulation on ICOs and crowdfunding was so specific to ICOs that it was outdated in three months because in the 2018 market, Initial Exchange Offerings (IEOs) were not covered. Therefore,  it is very important that regulators keep in mind as to how specific they can be when introducing a regulation as the industry is growing very fast and narrow specifications can only lead to more regulations being created to cover new products.

MiCA was first supposed to regulate the ICO market in 2017 which shows that the crypto industry moves faster than the regulators. This is why NFTs are not covered in this iteration. Current regulations in Europe seek to protect consumers, protect professional investors, ensure financial stability in the markets and encourage innovation. 

DeFi players like DEXs and DAOs want to be compliant but they need to introduce AML measures gradually rather than overnight. With MiCA, there is a lot of administrative burden which comes with complying and there is the risk that new innovations like new token classes are not covered.