Will MiCA Slow Innovation, or Does Crypto Need a Tune-Up?

For those who have spent a few years working in the digital asset space, 2022 was a hallmark for witnessing the best and worst the industry can offer. From groundbreaking technological innovations like the Ethereum Merge to the calamitous undoings of Terra/Luna and FTX, to geopolitical uncertainties, crypto enthusiasts rode alternating waves of turbulence and success.

However, of the events listed above, some could (and should) have been prevented. In fact, many of the provisions in the EU’s Markets in Crypto Assets agreement aim to establish guardrails that could align its member countries around a common vision for the industry. While some worry it could stifle innovation, they fail to grasp that reactionary clampdowns are significantly more destructive on the space than thoughtful regulation.

Markets in Crypto Assets, or MiCA for short, is a new regulatory framework poised for a vote in April that would update the European Union’s approach to digital assets. It’s been working its way through the chambers of continental bureaucracy since 2020, and if passed, the crypto ecosystem could enter an entirely revamped regulatory landscape. On its surface, MiCA is the first attempt of its scale to tame what many view as a notoriously feral industry. While implementation may cause some limitations in the short term, the benefits of eradicating some of the ecosystem’s more lackadaisical practices should outweigh these concerns.

A great way to conceptualize MiCA’s potential impacts on crypto is alongside the historical example of the Industrial Revolution. Despite being a period of explosive growth, this chapter was also marred by weak laws and standards that exposed communities to untold pain, disease, and suffering. Fast forward through countless workplace disasters and growing backlash against dangerous conditions, and regulators finally intervened. Today, building codes prioritize worker safety, and each industry has a tailored set of conditions to guide its contributions to society. These regulations add a much needed layer of protection to workers and the broader community, and often protect businesses from indulging in their more callus impulses. To this end, MiCA plans to provide similar processes to steer the crypto ecosystem toward embracing a higher caliber of service for all participants.

For too long, some entities in the digital asset space have chosen dubious materials upon which to build an ethical foundation. Namely, that economic incentive and community well-being are frequently viewed as being in direct conflict. Without a regulatory framework to balance these two elements, we know from history that health and safety can be quickly eroded. In the case of crypto, this often resembles knowledge gaps being exploited by bad actors to acquire assets and information from trusting participants. Unfortunately, the same qualities that help make the crypto space a successful incubator also allow for an environment where harm can manifest at the individual and institutional level. However, MiCA would place checkpoints along a user’s crypto journey to help ensure every player is behaving ethically through each transaction.

The new laws would establish a legal framework for different types of digital assets, and set appropriate standards that reflect their usage. It would define a crypto-asset as “a digital representation of value or rights which may be transferred and stored electronically, using DLT (or similar technology)” and offer two distinctions for stablecoins. Depending on the health and market capitalization of their affiliated currencies, stablecoins will either register as asset-referenced tokens (ARTs) or e-money tokens (EMTs). Each project would be required to produce proof of competency, maintain reserves, and offer regular updates on their network's progress and functionality. Like a health or building inspector, MiCA would help protect both users and the wider community by ensuring these new classifications of stablecoins are up to code.

New guidelines would also pump the brakes on projects that at one point required little more than a white paper to begin seeking outside investment. Depending on its scope, developers may have to register as a legal entity and provide additional materials before bringing their product to market. Some object that this would slow the rapid development the space has thus far enjoyed. However, much like standards that govern food and medical safety, these additional precautions would protect the market from ingesting harmful assets. If anything, these guidelines should help inspire innovation that’s both clever and conducive to the long term health of the crypto space.

Despite MiCA’s growing buzz in digital finance circles, much of the new framework has been in discussion long before it began to resemble coherent policy. For instance, in 2019, the EU Council, in conjunction with the European Commission, issued a joint statement addressing how the widespread use of stablecoins could spiral without proper vetting and regulation. Acknowledging the challenges present in overseeing this asset, the statement highlighted, “the potentially large and international size that some stablecoins may reach in the future creates concern regarding domains such as monetary sovereignty and monetary policy, as well as financial stability.” As if peering into a crystal ball, this quote portended the spectacular collapse of Terra/LUNA in May of 2022, when the asset fell from $40 billion in valuation to just $500 million overnight. This is just one of many examples where MiCA regulations could have mitigated a disastrous outcome.

Taken in conjunction with the fall of FTX, and now the liquidation of Silvergate and Silicon Valley Bank, these massive failures erode trust in our institutions. Much is made of the value lost with the toppling of each successive domino. Yet it’s impossible to measure how many participants opted to avoid the industry altogether in the wake of these events. While this loss of potential value is incalculable, even low estimates alongside known figures from bankruptcies and scams amount to an astonishing sum. However, by finally providing legal clarity to a space shared by millions, users now face a future where they could feel empowered to seek just treatment under continental law. With the introduction of rules for builders, exchanges, and traders, MiCA aims to reconstitute every aspect of the ecosystem’s layered functionality. For those invested in the continued well-being of the space, this should be a cause for celebration.