Europe: Roadmap Announced for Crypto Regulations

In Brief

• ESMA outlined the "Markets in Crypto-Assets" (MiCA) plan for implementation in a paper.
• The watchdog also cautioned about the financial risks associated with crypto assets.
• The paper remarked that contrary to traditional securities, crypto assets have no tangible value.

The Securities and Markets Authority in Europe has outlined its plans for the implementation of the much-discussed Markets in Crypto-Assets (MiCA), which aims to regulate virtual assets. It also cautioned about the financial risks associated with crypto assets.

The paper noted, “Alongside the surge of capitalizations and issuance of new types of tokens, there has been a corresponding increase in trading volumes, bolstered by the emergence of specialized crypto-asset trading platforms with sizes and volumes that now rival some of the smaller established markets.”

Europe concerned about the intrinsic value of crypto assets
The ESMA remarked that many crypto assets have no real-world or tangible value, contrary to traditional securities like stocks or bonds, which grant investors rights to future cash flows or claims on company assets in the event of liquidation.

“Due to their volatile growth cycles, and as long as relevant regulatory provisions do not apply, crypto-assets entail numerous risks which may in future become relevant for financial stability,” the ESMA noted.

The paper comes against the backdrop when the pound and euro crumbling on the international market. Messari recently noted in its research that people from the U.K. and EU have been selling their pounds and euros for Bitcoin as their national currencies’ values plummet.

The ESMA also raises concerns about how aggressive marketing initiatives directed at the public, especially towards less experienced retail investors, could increase speculative activity in the market.

It added, “The pseudonymity that prevails in crypto-asset markets makes it virtually impossible to assess the creditworthiness or aggregate exposures of participants.”

Final version still more than two years away
The document also highlighted a survey by the European Supervisory Authorities, which found that approximately 90 investment funds based in Europe have direct exposure to crypto in addition to 20 funds that have indirect exposure.

And to combat the risks, the paper notes ESMA’s established risk monitoring framework for the crypto-asset market. It covers five dimensions of liquidity, market, credit, contagion, and operation to analyze unbacked crypto-assets, backed stablecoins, crypto-asset service providers (CASPs), and decentralized finance (DeFi).

Meanwhile, the ESMA has also called for international standard-setting bodies like the Financial Stability Board (FSB) and the International Organization of Securities Commissions (IOSCO) to assist, given the global nature of the crypto-asset market.

It is anticipated that the final version of the MiCA framework, which aims to establish a comprehensive regulatory framework for crypto assets, will be published in the Official Journal in the spring of 2023 and go into effect 12 and 18 months post that.

German Blockchain Association had also previously updated the community that MiCA regulations will become fully applicable in 2024.

The updated bill, which was leaked on Sept. 20, will seek approval from the European Council and the European Parliament before taking effect.

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