The MICA, that is the future European legislation on virtual currencies: who hits and who grace
The growing popularity of cryptocurrencies has led authorities to want tighter regulatory scrutiny. for now in the world the regulations are extreme: we go to El Salvador, which has approved a law to declare Bitcoin legal tender, to China which has started a repression of BTC miners and which bans it completely.
Meanwhile, the European Commission's proposal for a regulation on cryptocurrency markets (MiCA) is in first reading in the Council and the European Parliament. This regulation will be part of the EU's digital finance strategy and is likely to have a significant impact on the functioning of the cryptocurrency market in the EU. It is a complex regulation (and 168 pages long), the effects of which require extensive discussion.
First, the regulation does not apply to the blockchain or DLT technologies underlying cryptocurrencies. It also does not apply to state-issued and central bank regulated digital currencies (CBDCs). All other cryptocurrencies that do not qualify as financial instruments, including utility tokens, to access services, or pure payment tokens are left out of this regulation.
In reality, all the truly decentralized and widespread mining realities will hardly be able to fall within the controls of the MICA, precisely because of their widespread and democratic characteristics. On the other hand, exchanges will be subject to regulation, also because the centralized structure of classic exchanges, in addition to the connection with the money market, allows the definition of security standards that will overturn in a greater guarantee for users.
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Another element that will be subject to regulation are the stablecoins. Assets directly linked to another stable asset, whether they are currencies, gold or other precious metals, stablecoins have an important function in the financial system of virtual currencies, but they are also centralized, therefore easily subject to constraints and controls, also necessary to evaluate the back of the stablecoin. Furthermore, through the regulation of stablecoins, it is thought that we can reach a greater analysis and understanding of deFi, decentralized finance, in which the returns obtained are, at present, much higher than those of ordinary finance.
What will be the effects of the MICA regulation? First of all, it will create barriers to entry: especially in the more regulated sectors it will be necessary to have a certain level of certification and financial credibility in order to operate. On the other hand, markets should become safer and less volatile. We will see if this is really the case.
However, this also means that unlike other cryptocurrencies, the value of stablecoins is not expected to increase exponentially over time. As a result, stablecoins are used in the cryptocurrency market for two main purposes. First, cryptocurrency owners turn profits into short-term stablecoins with the intention of investing in other cryptocurrencies when opportunities arise, rather than turning profits into fiat money and transferring them to their bank account.
Second, stablecoins are invested in cryptocurrency exchanges or decentralized financial applications to return interest and returns respectively. The former in particular offers a safe and attractive alternative to the traditional savings methods offered by legacy finance. Stablecoins can earn more than 10% annual interest compared to the 1% average offered by ISAs in the UK for which consumers will have to freeze their funds for five years.
The regulation uses terminology peculiar and unrelated to the cryptocurrency market and separates stablecoins into categories such as 'e-money tokens' (stablecoin whose value is linked to a single fiat currency) and 'significant asset refered tokens' (determined on the basis of the criteria listed in Article 39 of the Regulation). Stablecoins (which the regulation calls “asset-referenced” tokens) are subject to rigorous regulatory standards of transparency, operation and governance. Unlike other cryptocurrencies, stablecoins must be authorized by regulatory institutions to be traded within the EU, and the authorization requirement also applies to stablecoins already in circulation.
As a result, when the regulation enters into force, existing stablecoins will need to seek authorization from regulatory authorities to be traded in the EU. More importantly, the regulation prohibits the issuance of interest on e-money tokens. There is no explanation in the regulation as to why this intrusion into financial autonomy is necessary. This ban will deprive European citizens of an attractive investment option, particularly considering that the financial stimulus tools adopted to limit the economic impact of lockdowns are expected to lead to historically high inflation rates.
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The article Il MICA, that is the future European legislation on virtual currencies: who strikes and who favors comes from ScenariEconomici.it .
This is a machine translation of a post published on Scenari Economici at the URL https://scenarieconomici.it/il-mica-cioe-la-futura-normativa-europea-sulle-valute-virtuali-chi-colpisce-e-chi-grazia/ on Tue, 06 Jul 2021 06:30:37 +0000.