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Looking back, 2022 was a turning point for the development of crypto policy and regulation.
The European Union has agreed to its comprehensive regulation of crypto-asset markets (MiCA), while the US Congress has been debating bipartisan bills to govern crypto markets.
Regulators from Singapore to the UK have put in place rules to protect consumers from fraud and misleading advertising in crypto markets, while the dramatic collapse of Terra/UST has accelerated policy efforts to address the risks of stablecoins.
Meanwhile, US Treasury sanctions targeting mixer Tornado Cash have sparked controversy and extensive debate over decentralized finance (DeFi) regulation.
Above all, the collapse of the crypto exchange FTX in November prompted an equally dramatic re-examination of the need for urgent regulatory intervention to ensure the stability of cryptocurrency trading platforms and reduce opportunities for regulatory arbitrage.
After a busy 2022, 2023 is shaping up to be another year of massive activity, with regulators and policymakers poised to explore new frontiers in the crypto space.
In our new “Regulatory Outlook Report”we examine five trends that will have a big impact during 2023.
In this first of five excerpts from the report, we’ll explain how the EU’s MiCA regulation will become the blueprint for crypto regulation around the world.
FTX evokes a sense of regulatory urgency
The event that dominated the regulatory and policy debate in the second half of 2022 was the collapse of FTX – the cryptocurrency exchange platform founded by Sam Bankman-Fried.
Over the course of just a few days in November, FTX went from being a dominant force in the crypto space to filing for bankruptcy amid the loss of billions of dollars in user funds that it used to cover losses at its sister trading firm Alameda Research. FTX’s collapse caused losses and disruption at a number of other crypto firms with exposure to Bankman-Fried’s exchange — and resulted in the US indicting him on charges of fraud and money laundering, among other crimes.
The FTX saga immediately sparked calls across the industry and among regulators for increased regulatory oversight to increase transparency and accountability in crypto markets. Addressing the full range of challenges posed by the demise of FTX will prove complex and will take time. But as regulators around the world seek to put tighter rules around crypto markets to improve transparency and stability, they are likely to look to developments in Europe as a basis for the way forward.
MiCA
One of the biggest regulatory news of 2022 was that the European Union finalized the text of its massive Markets in Crypto-Asset (MiCA) regulatory framework. A formal vote in the European Parliament and publication in the first half of 2023, and the full provisions of the MiCA are expected to come into full force before the end of 2024.
Crypto-asset service providers (CASPs) in Europe will face extensive compliance requirements as a result of MiCA designed to improve transparency around their operations, minimize the potential for market contagion and reduce risks for users.
Under MiCA – among numerous other requirements – CASPs will need to demonstrate their:
- stability and solidity;
- the ability to protect the user’s funds;
- adherence to prudential standards;
- controls to ensure they do not engage in proprietary trading;
- avoiding conflicts of interest; and
- the ability to defend against market abuse and manipulation.
In addition, stablecoin issuers will face strict reserve and disclosure requirements to ensure token holders are protected from bank attempts.
Being incredibly comprehensive, MiCA gives market participants a clear indication of the rules of the road and helps them understand what is expected of them in the long term. We expect that in 2023 an increasing number of CASPs will seek to register in Europe in order to take advantage of one of the real benefits of MiCA – the ability for entities registered in one EU member state to “passport” their services across Europe without the need to obtain regulatory approval in all twenty-seven member states. This will help position the EU as a leader in crypto-asset innovation.
However, this should by no means be seen as a free pass. One consequence of MiCA will be a significant increase in compliance costs for CASPs in Europe. MiCA may not have necessarily prevented the FTX collapse from occurring given the extensive and global nature of that crisis. However, his measures would at least ensure that all European entities in the FTX corporate empire are subject to much stricter liability and disclosure requirements, and the impact on users could be mitigated.
Outside of Europe
We also believe that MiCA will have an impact that extends far beyond the borders of the EU. Because it is so comprehensive, MiCA is likely to become the template that many other countries around the world will look to when developing their own regulatory frameworks for cryptoassets. MiCA contains detailed provisions on stablecoin issuance, market manipulation, custody, transaction reporting and more. In the US, by contrast, policymakers are still considering dozens of discrete proposals covering these various topic areas, with no clear timeline for completion.
For countries that are still designing their regulatory frameworks – especially in parts of the world such as the Middle East North Africa (MENA) region – MiCA offers a unique ready-made template for how a comprehensive regulatory framework can be designed in one go.
We also expect international bodies and financial watchdogs – such as the G20, the Bank for International Settlements (BIS) and the Financial Stability Board (FSB) – to call on countries around the world to put in place regulatory measures aligned with those in MiCA designed to protect consumers and ensure good prudential practices on crypto exchanges.
These calls for improved standards will help achieve greater harmonization of regulatory standards for cryptocurrencies globally, which can help reduce the potential for regulatory arbitrage that has allowed FTX to take advantage of lax regulatory measures in many parts of the world.
During 2023, MiCA will become the blueprint for crypto regulation globally, charting the course for how crypto is regulated in much of the world for years to come.
To learn more, click below to download our brand new “Regulatory Outlook Report”.
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Click here for parts two, three, four and five of our excerpts from the regulatory review report.
Regulatory Financial Services EMEA
