5 questions about cryptocurrency law MiCAR

The European Parliament and the Council have reached an agreement on the MiCAR bill. This makes the legislation more concrete. These rules may apply to cryptocurrencies from 2025. Cm: gives 5 answers to questions about MiCAR.

1. What is MiCAR?

The European Parliament wants legal guidance for cryptocurrencies, a still largely unregulated market. The European Commission has proposed the Markets in Crypto Assets Regulation (MiCAR), and this regulation aims to provide Member States with tools to better protect consumers from risky financial products. Plans for this started after the cryptocurrency boom of 2018, but got a tailwind with the planned arrival of Facebook’s stablecoin. Diem (formerly Libra) went under before it got off the ground, but that doesn’t change the fact that the EU sees a need to hold cryptocurrencies to certain requirements.

2. For whom is this important?

This regulation is of great importance to both investors and crypto service providers. The legislation applies, among other things, to crypto exchanges, decentralized projects that work with tokens, providers of crypto assets and other cryptocurrency services. The new rules aim to protect consumers and therefore target services that offer crypto-assets to provide them with protection that should ultimately be similar to the same kind of consumer protection for regular financial products.

Like the financial market legislation MIFID and MiFID II, the protection of investors must be increased with MiCAR. Services where customers use cryptocurrencies face similar requirements in terms of insurance, capital requirements, complaints procedure and supervision. To the extent that this has not yet happened, Member States should also require that the identity of customers of such providers be verified. Services already covered by MIFID will not receive additional requirements with the implementation of MiCAR.

3. When does this apply?

In July 2022, the European Parliament and the Council of Ministers agreed on the new regulation. This is an important step that brings the road to regulation into its final phase. MiCAR describes binding rules that member states must comply with. These will translate the legislation into national legislation. They have 22 months to implement the legislation. The new measures are therefore expected to apply from around 2025.

4. So will cryptocurrencies soon become financial products?

AFM top woman Laura van Geest warned the House of Representatives in June not to have too many expectations for MiCAR. According to her, it is a first step, but it must be clear that cryptocurrencies are not normal financial products. Regulations like MiCAR, equating a cryptocurrency white paper with a prospectus, can give the wrong impression that this is the case, she says. According to the AFM chairman, trading in these products remains risky, MiCAR or not.

5. What about stablecoins?

MiCAR focuses on a number of specific assets and specific tokens that are linked to traditional currencies and therefore must have a stable value. Such stablecoins pose a risk to the capital market because if a stablecoin falls, it will affect the currencies held in reserve to support it. The Financial Stability Board and the European Central Bank, among others, have expressed concern about the impact of this decentralized currency on the stability of the traditional capital market.

Earlier this year, the stablecoin market faltered when an algorithmic stablecoin (see box) collapsed. Among other things, this led to shocks to the crypto bank Celcius, which in turn had outstanding loans with the company behind the largest stablecoin, Tether. The fears of governments and banks that stablecoins could disrupt the market have not materialized, but this development did not increase confidence in the future of stablecoins.

What are algorithmic stablecoins?

Algorithmic stablecoins work a little differently than a regular stablecoin. The value of this variant is backed by another cryptocurrency instead of dollars or euros. Stability is provided by an algorithm that automatically adjusts supply to demand. This is to avoid a fluctuating price. The practice is more unruly, has been proven several times with different algorithmic stablecoins. When TerraUSD began to falter, more Luna tokens were issued to correct the price. But with a loss of confidence in both currencies, Luna went on sale and the stablecoin’s decline was unstoppable.

The stablecoin market is still relatively small, but has grown in the run-up to the legislation. At the time of writing, we are in a bear market where cryptocurrencies such as Bitcoin are falling sharply, but the EU wants to be ready for a bull run and stablecoin proliferation. Even now that the immediate threat from Diem has disappeared, financial markets want to prevent a large part of the value from being placed outside traditional systems because there are no rules of the game.

“The recent depreciation of digital currencies shows that they carry high risks and that it is important to act,” MP Markus Ferber said of the agreement in July 2022. With standard requirements that align the market with the requirements of traditional financial markets, the parliament believes, that the cryptocurrency market is maturing.

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