In the last hours of the French EU Council Presidency, which ends at the turn of the year, European legislators have launched the new framework for crypto assets, the so-called MICA Regulation (Markets in Crypto Assets). The negotiators of the European Parliament and the member states agreed on Friday night on a preliminary legal text, which now has to be approved by the plenary session of Parliament and the responsible bodies of the EU Council of Ministers. The final approval is considered a formality.
It is the world’s first comprehensive legislative package to regulate crypto assets. The new rules are scheduled to come into force at the beginning of 2023. The legislation has thus been completed more quickly than initially expected. The day before, the negotiators had reached an agreement on regulating crypto transfers to combat money laundering.
The great turbulence on the crypto markets in the past few weeks has shown how urgent a framework for these markets is, according to a statement by the EU Council of Ministers. The new law will ensure that investors in crypto assets are noticeably protected for the first time. The providers of crypto assets would be held liable for market manipulation and insider trading.
Enormous energy consumption
In the future, all providers will need a kind of operating license from the national supervisory authorities. These must forward information about the major providers to the EU market surveillance authority ESMA. The providers must also maintain certain liquidity reserves.
Until recently, the main discussion was how the high energy consumption in the production of digital currencies such as Bitcoin, Ethereum and Tether should be reflected in the regulation. For Bitcoin, for example, specialized hardware is used. This is expensive because the Bitcoin network only accepts real digital coins that were created with complicated calculations and are secured by encryption (cryptography).
This is associated with high power consumption. It is not only the production that is energy-intensive, payments also consume a lot of electricity and data. When Bitcoin changes hands, the entire transaction history is transferred to users’ computers, which is intended to prevent errors and counterfeiting. This decentralized storage and verification is complex, but makes it possible to transfer data from one user to another without a central platform. Bitcoin serves as a digital form of cash.
The EU as a pioneer in the digital world
It was disputed whether this procedure should be linked to very high environmental standards (“Proof of Work”). Had this happened, it would have amounted to a de facto ban on the digital currencies produced in this way. It doesn’t come to that now. Instead, providers of crypto assets must disclose the energy consumption and environmental impact of their production. The EU stock exchange supervisory authority ESMA is to develop technical regulatory standards for this.
The responsible rapporteur in parliament, the CDU MP Stefan Berger, said that MICA “should not have been the birth certificate of a European proof-of-work ban”. “Sustainability must also be possible without banning technology. It is good that Parliament, the Commission and the Council have jointly embarked on the path of openness to technology.”
The “wild west” that ruled the global crypto market is now over, Berger said. The set of rules is extremely important because tokenization – i.e. the digital mapping of assets via blockchain technology through tokens – is as groundbreaking for the financial world “as the introduction of the stock company in the 17th century”.
MICA creates reliable approval and supervisory structures for new tokens, emphasized Berger. “The new opportunities for both different assets and investors are enormous and will shape the future of capital markets.” for the digital world.