- MiCA radically changes the way CASPs operate in Europe.
- The authorized license becomes mandatory.
- Levels of false advertising declines.
- Higher exposure to TradFi investors is expected in the long term.
The European Markets in Crypto-Assets Regulation (MiCA) will fundamentally change how crypto asset service providers (CASPs) operate in Europe.
Coming into effect on 30 December 2024, MiCA will mark the first comprehensive crypto regulatory framework and is expected to set a precedent for other jurisdictions.
Experts say that as the global race to become an ultimate crypto hub continues, clear regulations are essential for attracting investments.
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So, what will change for crypto businesses, and how will this impact their customers?
Unified MiCA CASP Regulations Across the EU
The fundamental change that MiCA will bring is a unified regulatory framework valid across all 27 European Union (EU) countries.
This will bring EU members to the same level and eliminate the massive regulatory inequality that European crypto service providers face today.
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“There is a big gap between European Union countries in terms of registration of crypto businesses,” states Karolis Jonuška, the Head of Legal at financial service company iSun, and financial platform SwissMoney.
“MiCA will put countries on the same floor. So we’ll have an even regulatory regime. That is good for the customers, and that is good for the business.”
Before MiCA, the EU framework for regulating cryptocurrencies was largely limited to the 5th Anti-Money Laundering Directive (5AMLD). Anti-Money Laundering (AML)-related obligations were imposed on crypto asset service providers.
On a national level, however, the paths of EU member countries diverged. Some implemented further provisions by creating comprehensive regulatory regimes. In contrast, others adopted a more minimalist approach, where registering with a tax authority was enough to start as a crypto asset service provider.
New rules unify principles of how CASPs are registered and how they operate across the world’s second-largest crypto economy.
A crypto law expert suggests that unified regulation levels the playing field for crypto service providers, ultimately benefiting retail users. This allows them to choose from a broader range of operators and services.
“MiCA will be a sort of quality assurance for the business and a key change for the retail investors.”
On the other hand, crypto asset service providers already meeting higher compliance requirements will have a first-mover advantage. They will easily obtain the right to operate throughout Europe while their competitors wait in line.
Meanwhile, jurisdictions where compliance requirements are minimal will face challenges. Despite adapting to the legal framework, grappling with the technology, and hiring many new staff, they will be clogged with CASP applications, some of which might be rejected.
CASPs Will Need Licenses
As MiCA comes into effect, all crypto asset service providers must obtain licenses from national authorities to operate within the EU.
This means that all crypto exchanges, payment processors, miners, custodians, brokers, crypto ATM operators, and token issuers must comply with the same stringent requirements that apply to traditional finances today.
In short, CASPs must implement critical changes to operate legally within the EU.
Tighter Rules on Internal Policies
When MiCA is implemented, the European Union’s virtual asset service providers will face stricter requirements for internal policies and corporate governance principles.
CAPs will be asked to prepare a detailed business plan for authorization, outlining the nature of services, target market, and operational strategies.
As money laundering and terrorist financing prevention remain mandatory, new rules will also include clear corporate governance policies and the need for an impeccable reputation of shareholders and managing personnel.
CASPs will be additionally asked to ensure effective risk management, data, and customer protection measures, separate clients’ funds from their balances, and provide clear customer complaint handling procedures.
This will help solve current crypto space issues, such as retail investors being left without legal protection if their crypto service provider suddenly disappears from the internet. Now, they will at least know whom to contact to request their money back, notes a crypto law expert.
On the other hand, MICA automatically means much larger compliance investments for CASPs applying for an EU license, which brings them even closer to TradFi.
“It's very normal for FinTech businesses to have 60-70% of all the expenses for compliance alone, which up to now has been very unusual for crypto businesses,” states Jonuška.
According to him, increased compliance obligations will eventually make CASPs more traditional and even bureaucratic, which can be viewed as a sign of maturity.
“We were in the Wild West before. So it’s the natural next step that we have to do. I think retail investor is the one that we’re focusing on here. We have to have that. It’s the only way for us to have the checks and balances.”
Higher Share Capital Requirements
Another big difference is crypto asset service providers’ increased share capital requirements.
The minimum capital will align with the current requirements for TradFi businesses and will vary based on the nature of the services.
The share capital will be significantly higher than required in most EU member countries today, states Jonuška. “That will probably put some smaller players out of the picture.”
Yet, according to the lawyer, such capital requirements are not too strict and should not be an issue for the bigger businesses, which will be capable of squeezing into the. When share capital is not locked, crypto companies can use it in their activities.
Passporting for CASP Business Expansion
A significant feature of the new regulation is passporting, or the license to operate across all 27 European Union member countries with a population of 450 million.
This means crypto service providers from Lithuania will no longer need to acquire separate licenses or adhere to national regulatory requirements to extend operations in Denmark or Spain.
“This is our trademark, the DNA of the single market for financial services,” stated Mairead McGuinness, European Commissioner for Financial Services, Financial Stability and Capital Markets Union.
In her Crypto-Asset Strategy speech, the EU commissioner hinted that MiCA and passporting rules will help enhance citizens’s protection and innovation across the EU jurisdiction. With the broader market opening for the crypto service providers, their customers are also expected to benefit from the increased competition.
Less False Advertising
In addition to licensing, MiCA will also establish strict marketing policies to safeguard against informational manipulations.
Today, most of the EU crypto businesses operate through reverse solicitation, which claims that businesses not established in a jurisdiction where the customer can serve that customer if he or she comes to the business himself.
Simply speaking, companies can claim they are not advertising, and customers find them on their own initiative. It’s a public secret that third-party companies outside Europe have been exploiting the situation, says Karolis Jonuška.
“That puts a very unfair advantage on companies operating in European jurisdictions that have strict regulations. They are pretty limited in how they can advertise to be compliant. While others who come from less restrictive jurisdictions or even outside of Europe can basically advertise anything.”
MiCA will eliminate this legal gap, adds Jonuška, highlighting the positive effect of European customers being “first of all, bombarded less with false advertising on the internet, claiming facts that aren’t true.”
Increased Competitive Advantage for CASPs After MiCA
Ultimately, Europe anticipates that MiCA will play a pivotal role in driving the strategic economic growth of the region.
In the global arena, regulators and major jurisdictions are competing to become the world’s crypto hub.
Historically, Europe has not been at the forefront of technological advancements. Looking at European investments in new technology rates, it is clear that the region is lagging in innovations.
Here, Web3 brings an opportunity to challenge the current US dominance in technology and allows every jurisdiction to start from the clean sheet, believes iSun’s and SwissMoney’s chief lawyer.
“Clear regulatory regime is one of the ways to compete, and Europe decided to take that approach. This gives clarity to the business and clarity of expectations.
Because if I’m a businessman, I want to have expectations set and expectations met. When I am deciding where I to establish my business, I want to plan five, ten, fifteen years ahead to make investments.”
How MiCA regulations will work in practice, CASPs and their clients will see no later than 30 December 2024. However, experts do not doubt that a unified regulatory regime will affect the crypto landscape in the EU.
While some crypto asset service providers will be forced to shut down or move to third parties, stricter MiCA rules should not significantly change the lives of larger and established CASPs.
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