Will MiCA Bring an End to Europe's “Crypto Winter”?

A number of significant events led to a period of considerable unrest in the global crypto market during the past 12 months. As the financial services sector emerges from a so-called “crypto winter”, our Financial Regulation team assesses whether effective regulation under MiCA will restore confidence in the crypto industry in 2023 and beyond.

It has been a turbulent 12 months for the global crypto industry. Clouds first gathered with the collapse of stablecoin Terra and its sister token Luna in May 2022. This was swiftly followed by the bankruptcies of crypto lender Celsius Network and hedge fund Three Arrows Capital. The period of turmoil culminated with the dramatic collapse of crypto giant FTX in November 2022. Recently, the unrest in the American crypto market triggered a run on two central crypto bankers, Silvergate Bank and Signature Bank, which ultimately caused them both to fail in March 2023.

Following this, we consider the outlook for the crypto industry in 2023 and beyond.

Is crypto winter over?

Recent events aside, crypto investors still have some cause for optimism. Overall, crypto usage continues to grow in 2023. Bitcoin has rallied somewhat and its price is rising again. Many are of the view that the issues do not lie with crypto assets themselves but have arisen as a result of platform owners making poor business decisions and taking risks with users’ assets, reminiscent of behaviour which led to the 2008 global financial crash.

Regulation to the rescue?

Against this unsettled backdrop, on 20 April 2023 the European Parliament voted in favour of the proposed Regulation on Markets in Crypto-Assets (MiCA), which aims to regulate the issuance, distribution and trading of digital assets, as well as the provision of crypto-asset services. Once formally approved by the Council of the EU, MiCA will be published, and is likely to enter into force in early to mid-2024. MiCA will be introduced in two parts: the first phase will deal with stablecoins. The second will deal with crypto asset service providers, or “CASPs”.

The UK has also set out its proposed regime to regulate the crypto industry under the UK Financial Services and Markets Act 2000.

In contrast, the US has yet to develop a regulatory regime for crypto. Instead, the US securities regulator has so far focused on enforcement action as a way to regulate the industry rather than putting a crypto specific regulatory framework in place.

How will regulators supervise CASPs?

Under MiCA, a CASP will require authorisation from a competent authority within the EU in order to passport its crypto services across the rest of the EU bloc. Regulatory requirements will vary depending on whether CASPs provide custody and administration of crypto-assets, trading platforms, or otherwise. CASPs deemed ‘significant’ under MiCA, i.e., with an average of over 15 million yearly active users in the EU, will be subject to a greater level of oversight.

MiCA seeks to address some key issues, including the corporate structure of CASPs. Applicants must have a registered office in an EU member state from which they will provide crypto-asset services. Other requirements centre around the establishment of robust corporate governance and controls. This is likely intended to combat the operation of conglomerates ‘bundling’ products and functions within one firm, rather than separating functions into different entities and/or ringfencing them appropriately.

Client asset protection rules will also be in place for CASPs under MiCA. CASPs authorised for the custody and administration of crypto-assets on behalf of third parties will be required to segregate crypto-assets held on behalf of clients from their own holdings. FTX’s alleged use of client assets to fund its owner’s trading firm, Alameda Research, underscores the importance of client asset protection rules.

What’s next for crypto in Ireland?

The Central Bank of Ireland has indicated that it has commenced its preparation for the implementation of MiCA and is working on the integration of the regime into its supervisory and authorisation processes and methodologies. It is expected that MiCA will replace the current VASP regime that applies in Ireland.

Conclusion

When MiCA comes into force in 2024, it will introduce a harmonised regulatory framework for crypto across the EU. It may be the case that increased regulatory oversight, and the imposition of clear rules on players in the industry, will go some way towards restoring consumer confidence in the crypto market, both within Europe and globally.

For more information on what's in store for crypto in Ireland, contact a member of our Fintech or Financial Regulation teams.

The content of this article is provided for information purposes only and does not constitute legal or other advice.