GB Market Commentary 01/07/2022
by Marcus Sotiriou
Whilst Bitcoin remains below $20,000, the EU have finalised the MiCA Proposal - Markets in Crypto-assets (legislative proposal developed to help streamline distributed ledger technology (DLT) and virtual asset regulation in the European Union). These regulations will impact crypto companies to help prevent money laundering and other illicit activities potentially involving digital assets.
Spanish Green Party lawmaker Ernest Urtasun, who took part in the process, explained:
“The new rules will enable law enforcement officials to be able to link certain transfers to criminal activities and identify the real person behind those transactions.”
A key development has occurred with ‘unhosted wallets’ - wallets held by private individuals that are not managed by a licensed platform. The EU Parliament has always been in favour of forcing CASPs (crypto asset service providers) to identify their "unhosted" counterpart when transacting.
The finalised regulations claim, "in case a customer sends or receives more than 1k euros to or from their own unhosted wallet, the CASP will need to verify whether the unhosted wallet is effectively owned or controlled by this customer." This will not be taken well by many crypto users, who value their privacy, however for most transfers from/to wallets, there won't be a mandatory verification. Also, the initial demand called ("unhosted wallet verification") from the EU Parliament was weakened.
In addition, unfortunately for stablecoin issuers, MiCA have introduced an option for EU authorities to stop stablecoin issuance (ARTs & non-Euro EMTs) if used on a large scale for payments.
On a positive note, lengthy negotiations have resulted in DeFi being left out of MiCA scope. However, the commission will publish a separate report in 2023 for a new form of "embedded DeFi supervision".
Furthermore, the Bitcoin ban which was discussed previously (involving the Proof of Work mechanism) has been neglected. Instead, CASPs will have to disclose information the sustainability of the crypto-assets they provide services for.
Why are these regulations so key for the crypto market?
As the EU is the first major jurisdiction to implement a comprehensive regulatory framework for crypto, these rules will set global standards and affect regulations globally (including the U.S.)
Are these regulations a positive for the industry?
MiCA includes aspects which many will be aggrieved about, including the ‘unhosted wallet’ rule, but in my opinion the rules are a net positive development for the crypto industry within the EU. Aside from the added clarity that many businesses and financial institutions have been waiting for, I think the most pleasing aspect was that the Proof-of-Work ban (introduced because of its environmental impact) has been taken off the table. This demonstrates how policy makers have listened to those fighting back against the proposed rules, and recognition of a concerted effort towards a sustainable future for Proof-of-Work mining.