Can MiCA bridge the gaps between TradFi and blockchain-based transactions?

TradFi, or traditional finance, has been a stable pillar of the economy for decades but is slowly hindering productivity. As society moves towards decentralization and high-tech solutions, TradFi is no longer the anchor of an economy’s stability. 

On the other hand, decentralized finance (DeFi) includes blockchain-based transactions, smart contract interactions, and decentralized exchanges for lending and borrowing. Compared to TradFi, DeFi provides enhanced transparency, permissionless access, and interoperability. 

However, introducing decentralization in a system with outdated practices and hardware requires a new set of laws. Therefore, the European Parliament designed MiCA (Markets in Crypto-Assets) regulation to support market integrity and regulate crypto-assets. The guidelines allowed European banks and asset-related businesses to integrate cryptocurrencies and blockchain technologies, according to the latest crypto news today.

Still, Europe’s MiCA has limitations and has yet to provide accurate regulation for fast-paced technological development. Can it be a valuable tool for other countries? 

What does MiCA regulate? 

MiCA generally addresses crypto-assets from a regulatory perspective. Its goal is to create a licensing and supervisory guideline for businesses that issue cryptocurrencies and crypto platforms for different types of coins. Exchange tokens, like Bitcoin and utility tokens, are included, as well as asset-reference tokens (ARTs) and electronic money tokens (EMTs). 

MiCA should also protect users against fraud and help them gain trust in financial brands, which is essential, especially after the FTX collapse. Therefore, customers will access trustworthy information about cryptocurrencies, whose risks will be monitored by appointed technicians. In addition, the solution will support innovation by allowing crypto service providers to scale up their business in this specific market.

MiCA and stablecoins 

Stablecoins are cryptocurrencies whose values are pegged to assets like fiat currencies, which maintain price stability. For example, Tether (USDT) is pegged to the US dollar, but the Hong Kong-based company behind it also issues coins pegged to the euro or the Chinese yuan. 

Considering their value and safety, MiCA has provided specific oversight for stablecoin issuers to operate in the EU. They have to seek regulatory approval, achieve an Electronic Money Institution license, and own full one-to-one reserves. At the same time, providers must deliver regular reports of their operations and be transparent when undergoing independent financial audits. Finally, their stablecoins must serve as a means of payment and not as an investment vehicle. 

Is the stablecoin regulation enough?

The MiCA regulation is a bold step ahead in accepting cryptocurrencies, but it will need to be refined in the future. While it provides more clarity into how companies can offer cryptocurrency products to users from 2023, it limits usage on important stablecoins like USDC and USDT as they’re non-Euro pegged, so the number of transactions allowed stops at one million. 

Although both stablecoins are MiCA compliant, this issue can hinder innovation and impact liquidity. In addition, MiCA must oversee interoperability and crypto-fiat payment solutions to avoid market fragmentation. Luckily, numerous startups in Europe can help EU organizations improve their approach.

Cryptocurrency needs regulation 

Regulation has an essential role in making cryptocurrency safer for users. Considering the risks of volatility and cybersecurity vulnerabilities, regulation should be able to advise users regarding protection measures and set some ground on which types of crypto projects are safe enough for a broad range of users. 

In addition, strong government guidelines are needed to build trust and support regulated and responsible issuers. Digital assets operating in unregulated markets should be left in the past, as they’re usually exposed to a lack of transparency and uncertainty. 

Regulation is also an important tool for businesses that want to expand their products and services under the protection of the law. For example, EU companies can now use stablecoins from regulated issuers under legal security backed by audits. Therefore, compliance provides a more predictable market and minimized risks. 

What are some approved stablecoin issuers in the EU under MiCA?

There are several stablecoin issuers to look out for in the EU crypto market that can offer “e-money tokens”: 

• Circle issued EURC with one-to-one reserves; 
• Societe Generale supports EUR CoinVertible (EURCV) which is directed to the banking system; 
• Banking Circle issued Eurite (EURI) that’s available across multiple blockchains like Ethereum and BNB Smart Chain; 

These stablecoins include a wide range of use cases, including the ability to conduct EU transactions, payment remittances, and access to DeFi. In addition to the stablecoins, several crypto exchanges are also MiCA compliant, meaning they’ve prioritized important aspects like anti-money laundering and market integrity standards. Obtaining MiCA licenses is only the beginning of accepting cryptocurrencies, considering the ever-evolving regulatory landscape. 

Why has USDT not reached MiCA regulations?

Unfortunately, not all stablecoins could enter the race for adoption in Europe. USDT, for example, one of the largest stablecoins by market capitalization, has been delisted from EU exchanges due to its failure to meet licensing requirements. In other words, Tether could not be clear about having sufficient reserves and complying with regulations according to regulators. 

Therefore, investors are looking for alternatives like USDC and DAI since most exchanges delisted the USDT stablecoin. Considering the tight evolving landscape, it might be possible for USDT to be excluded from many other major exchanges in the EU despite its benefits and investment opportunities. 

Unfortunately, the delisting will impact market liquidity since altcoins have been one of the most important in the market due to enabling seamless transactions and being the primary option for efficient prices. From now on, maintaining efficient trading conditions will be more challenging under MiCA regulations, so users might experience higher transaction costs and reduced liquidity depth due to the market’s fragmentation. 

What do you think about MiCA? 

The MiCA regulation is a remarkable step toward decentralization and modern finance a government has ever accomplished. It protects users by asking crypto providers to provide a license and follow regular audits and reports on transparency. Recently, it switched its attention to stablecoins, having approved several assets and broadening the market. However, the lack of experience in this industry results in fragmenting the market, which will eventually affect liquidity and the provider’s ability to innovate.