The EU MiCA regulation is changing how crypto businesses operate in Europe. The once loose regulations have been tightened for the companies that once succeeded in a space. While the concept in and of itself can be a step towards market stability, worrying arises about its negative influence on innovation. Will this additional regulation make things clear or will it slow things down? To remain competitive in the European crypto market, you need to understand what these changes are.
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Licensing Rules for European Crypto Companies
The crypto businesses have to be licensed as a crypto asset service provider (CASP) under MiCA. This is also true of exchanges, and also wallet providers and token issuers. If this approval is not given, the provision of services within the European Economic Area (EEA) becomes illegal. The new rules include businesses that exchange crypto for fiat or other assets, provide wallet services, trading platforms, investment advice regarding crypto, among others. Any company that meets these criteria must be registered with an EU financial authority (BaFin in Germany, AMF in France, etc.) in order to sell its services to European users.
An extensive documentation is needed in the licensing process, such as a clear business model, risk management plans, cybersecurity measures, etc. To get started, the company needs to apply through a national regulator and meet capital requirements that show the financial stability. We also have regulators to make compliance checks where they check to see if we comply policy with anti money laundering (AML) and security protocols. The process is certainly time consuming and expensive for startups. They must make sure that all the requirements are met regarding the legal and compliance teams. So, large exchanges can comply, small businesses can’t. Others will decide to leave the EU market altogether rather than contend with these regulatory burdens.
New Rules for Stablecoins and Other Tokens
MiCA comes with strict requirements for stablecoin issuers and clearly defines different token categories. The purpose is to avoid financial instability due to unregulated token emission. Now, stablecoins are categorized into two: asset-referenced tokens (ARTs) which are pegged to a number of currencies, commodities or assets and e-money tokens (EMTs) which are linked to one currency (like the euro or US dollar). The regulation stipulates that stablecoins must be backed by reserves that match 100% of the supply they issue. To ensure transparency, Issuers must report regularly to European Banking Authority (EBA) with their reserve holdings. Furthermore, there is a €200 million daily transaction limit on non euro stable coins rendering them less used in Europe.
The market will most likely be affected by these restrictions. However, such a cap could trouble the popular stablecoins such as Tether (USDT) and USD Coin (USDC) that cannot be used for large scale transactions in the EU. This means that euro backed stablecoin may then pick up, since they suffer not from the same constraints. In some cases, stablecoin projects may even entirely leave the European market, making fewer options for businesses and users.
Compliance and Reporting Requirements
MiCA also requires transparency in order to protect users and prevent fraud. Those companies that operate under the regulation must comply with strict anti money laundering (AML) and know your customer (KYC) rules. At the moment, exchanges and wallet providers need to verify user identity and require even more due diligence when a transaction is over €1,000. Regulated platforms will no longer allow anonymous crypto transactions, which may push some of the users to decentralized finance (DeFi) services that do not require identification.
Companies have to continue to keep financial records in existence for at least five years and report any unusual activity to regulators. There must be cybersecurity measures to protect user fund from breaching. Failure to comply with these requirements can attract penalty up to 5% of annual revenue as fine. In the worst cases, companies can even be banned entirely from operating in the EU market. Although measures are in place to promote trust, it comes at the cost of operations for businesses. To be compliant with MiCA, investments in legal support, technical infrastructure and for regular audits are required. These financial burdens could restrict them from competition if they are for smaller players.
How MiCA Affects Crypto Exchanges and Wallet Providers
MiCA also requires exchanges and wallet providers to adjust their business models. This is one of the most important changes that has happened is token listings. To cut back the risk of scams, exchanges are now obliged to verify tokens previous to listing them. To be listed, any project has to provide a detailed whitepaper which describes the purpose of the project, the risks involved, and the financial structure. A token that does not meet regulatory standards will not be approved for trading.
Wallet providers face additional challenges. The services of custodial wallets now have to keep detailed records of all their transactions and be fully compliant with regulatory standards. Before accessing regulated wallets, users must verify their identities and providers are responsible for securing customer funds against threats. These rules give an advantage to the large, established companies with the money to comply. But adapting to MiCA’s requirements for European crypto will be difficult for smaller businesses. Consequently, some may shut down or shift operations outside the EU to avoid regulatory burdens.
Conclusion
The crypto firms operating in the EU are also subject to new, stricter controls that have been imposed under MiCA, which sets the clear regulatory standards to which these crypto industries must adhere to. On the consumer’s side, it offers stronger protections against fraud and financial loss, but on the business side, businesses have to invest in licensing, compliance and transparency. Stablecoin market could be disrupted by €200 million transaction limit, and some companies may choose to leave Europe because it is too expensive. But this framework is a good basis for European crypto growth in the long term within the EU.
