5 questions about cryptocurrency legislation MiCAR

The European Parliament and the Council have reached an agreement on the MiCAR bill. This brings the legislation closer to reality. From 2025, these rules may apply to cryptocurrencies. 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 should provide Member States with tools to better protect consumers from high-risk financial products. Plans for this started after the cryptocurrency boom of 2018, but got muddled with the planned arrival of Facebook’s stablecoin. Diem (formerly Libra) went under before it really got off the ground, but that doesn’t change the fact that the EU sees a need to hold cryptocurrencies to certain requirements.

2. Who is this important to?

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 are designed to protect consumers and therefore focus on services that offer crypto-assets to provide them with protection that should ultimately resemble the same kind of consumer protection of regular financial products.

Like the financial market legislation MIFID and MiFID II, investor protection should be increased with MiCAR. Services where customers use cryptocurrencies face similar requirements in terms of insurance, capital requirements, complaints procedure and supervision. Member States should also, if not already done, require that the identity of customers of such providers be verified. Services that already fall under MIFID will have no 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 that it must be clear that cryptocurrencies are not normal financial products. According to her, regulation like MiCAR, by equating a cryptocurrency white paper with a prospectus, can falsely give the impression that this is the case. 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 for support. 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 because an algorithmic stablecoin (see box) collapsed. This led to blows for the crypto bank Celcius, which again had outstanding loans with the company behind the largest stablecoin, Tether. Fears by 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 should prevent a fluctuating price. The practice is more stubborn, as has been shown several times with various algorithmic stablecoins. When TerraUSD began to falter, more Luna tokens were issued to correct the price. But with confidence in both currencies losing ground, Luna sold out and the stablecoin’s decline was unstoppable.

The stablecoin market is still relatively small, but grew in the run-up to the legislation. At the time of writing, we are in a bear market with a big dip in cryptocurrencies like Bitcoin, but the EU wants to be ready for a possible bull run and spread of stablecoins. Even with the imminent threat of Diem gone, financial markets want to prevent a significant portion of value from moving outside traditional systems because there are no rules of the game.

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

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