EU’s MiCA rules, how to stop crypto going nuclear

And how to differentiate the UK through regulation

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Balancing act

A nuclear reactor is a chunk of plutonium that is continuously releasing neutrons. The energy it makes depends on how many of those neutrons are flying around in there. If you make a hole in the core and poke a rod of barium into it this will mop up those flying neutrons and lower the energy production. Poke it in all the way and the energy will die down to just a trickle. But take the rod out completely and the core will explode in a massive burst of energy. The trick is to poke the rod in and out just enough to keep it ticking over, to keep it on the brink of exploding. Then it provides huge amounts of energy that can be beneficial.

Regulating crypto is in many ways the same balancing act. The core is the crypto technology, the rod is the body of regulations. Put loads of heavy regulation in place and the tech-buzz will fizzle out as start-ups go elsewhere to do their innovation. Take the regulations away and the crypto explodes with wild-west scams, crashes and disappearing CEOs.

Europe and the UK are both in the process of sorting out regulations to dampen down the tech, and bring it under control.

MiCA: Markets in Crypto-Assets

As part of these moderating regulations the EU has released its MiCA laws. These define a set of defined crypto assets and a set of ten services that can be delivered around these assets. Like many things connected with the stability of the banking world it is a slow process. If you think back to Brexit, it wasn’t a ‘bang’ and the UK was out of the EU, it was, (and still is!) an ongoing process of decoupling and law making. The same will be true to a lesser extent with MiCA, although the laws have all been ratified there is a lengthy transitional period before the laws start being applied in ernest in December 2024. Some parts of the legislation, especially those dealing with stablecoins, have been given a shorter transitional period and will be applied in June 2024.

The laws focus on protecting two things; customers and the economy, here are two examples of how they do that:

Protecting customers

MiCA protects customers at the point of sale. In particular the regulations cover the content of the white paper (the sales brochure for crypto assets). It doesn’t need approval but MiCA is very precise about what information should be included in the white paper, in this way there is transparency for the purchaser regarding all aspects of the product they are purchasing.

The other protection is a cooling-off period after the purchase of a crypto asset. Customers who make the decision to buy, possibly as a result of intense marketing, have a window of time within which they can change their mind and get a refund. Of course this only applies to assets that do not yet have a traded market, so you can’t say ‘My crypto has tanked; I want my money back’!

Fiscal safety

There is a world of crypto and there is a world of conventional finance, these two worlds overlap considerably when it comes to stable coins (coins with a valued pegged on some real world currency or asset, in effect a crypto-dollar for example). If the world of crypto goes wrong you don’t want that to have knock on effects in the world of conventional finance.

Stable coins are more strictly regulated by MiCA, the whitepaper doesn’t just have to follow rules, it has to be actively approved and there are more laws that can come into play. There is a section on throttling transaction numbers so that if anything does go disastrously wrong it will happen slowly, and there are other regulations that apply if the stable coin is becoming widely used, this is what the European Banking Authority defines as ‘being significant’. So if you set up a stable coin then there are regulations, but if the stable coin starts to really take off and there is so much of it in circulation that issues with it could effect the wider economy then there is another level of regulations.

MiCA can even come into play for things that are outside its scope of crypto assets, things such as NFTs. Just as with the extra rules for ‘significant’ stable coins, NFTs can also become ‘significant’. If someone produces a really huge collection of NFTs where the tokens are technically unique, but are so numerous that they are pretty much interchangeable with each other (ie. fungible!), then they become ‘of interest’ and can be deemed to come under the MiCA regulations.

And the UK?

Meanwhile the UK is still very much a work in progress, small enough and agile enough to take stock of developments in the EU and come up with their own adjusted suite of regulations.

Until recently the main regulations in the UK’s armoury were the registration scheme for Anti Money Laundering (AML) law. Which the UK applied very stringently, only around 15% of the companies that applied got approved. This was accompanied by the guidance for crypto assets from 2019, very much a case-by-case evaluation of companies and schemes for the applicability of current regulations. The shock waves from Brexit took a lot of the attention of the UK legal world away from crypto, but now it is starting to be addressed more comprehensively.

As part of the post Brexit law readjustments there is the Financial Services and Markets Bill (FSMB), this addresses the UK laws that were inherited from the EU days and replaces them with UK specific law which will incorporate crypto considerations. And there are consultations happening on other key crypto areas looking at how to integrate crypto assets into the existing UK financial regulations framework.

While Europe has knuckled down and got on with drafting regulations, the UK has had a hiccough with the legal impacts of Brexit but it is now very actively putting that right

UK Flag

Unique opportunity

But the key thing isn’t Europe’s MiCA regulations, or what the UK is doing to play catch up. The key thing is the difference between them. While there are activities relating to cooperation between the two sets of regulations, in particular the recent memorandum of understanding (MoU) on financial services cooperation, many believe that the UK shouldn’t be copying the EU regulations exactly, they should open up a gap between the UK and the rest of Europe. It is a unique opportunity for the UK to do things differently, not radically differently, but differently enough to give the UK the edge in matters of crypto innovation.

Since Brexit the UK is a legal island and capable of developing its own laws independently of the EU. Returning to the reactor analogy; it might be possible for them to withdraw the rod a tiny bit more than their European neighbours and generate more buzz. They could set themselves up as a more attractive place to carry out ground-breaking cryptocurrency work, with less throttles and less red tape. Get it right and the UK will once again bask in the ‘white heat of technology’, get it wrong though and it could all blow up in their faces.

Post by Lon Barfield

Appmilla is on a mission to increase financial inclusion through the design and development of FinTech and Web3 apps. We’re working on rapidly building the team and forming partnerships in FinTech regulatory compliance, technology and services – please get in touch if you want to talk about how we might work together.