Crypto market regulations and European Union

In addition to the US, the European Union is also trying to introduce regulations defining the crypto market on its territory. The regulation is known as Markets in Crypto Assets (MiCA).

The adoption of the regulation was scheduled for November 2022. Then it was postponed to February 2023 and April this year. Considering the complexity of the regulation, this deadline may extend even more. The delay also occurs due to the attempt to create a comprehensive regulation, which is a challenging job, and if it succeeds, it will be a unique example in the world. EU should implement the regulation in 2024 if it is adopted this year. Could MiCA, with its imperfections, qualify as a comprehensive framework in 2014? Is this set of rules going to be effective in avoiding disasters like those caused by TerraUSD or FTX?

EU Regulation of DeFi and its Impact on the Crypto Ecosystem

Using smart contracts on the blockchain, Decentralized finance (DeFi) can provide financial services that don‘t rely on intermediaries such as banks, stock exchanges, or brokerage houses. At the moment, the EU is not ready for DeFi and, therefore, not ready for cryptocurrencies, and there is a tendency for MiCA to change that. For now, centralized crypto exchanges enjoy trust. At the same time, the new regulation should provide rules dealing with all aspects of the cryptocurrency business.

The global problem with DeFi regulation is that it is unregulated. Most buyers will continue to trade cryptocurrencies mostly through centralized crypto exchanges even after the regulation is enacted and implemented. However, regulators will be able to more easily monitor crypto exchanges and engage in their work, thus preventing possible abuses. Although it is impossible to regulate it completely, it is still possible to do it to a certain extent. DeFi is the most prominent, but not the only limitation of the upcoming MiCA regulation. The EU framework must also address the growing crypto-lending and investment sector.

Stabilizing the market

Poor practices in this space, such as poor or non–existent risk management, fueled last year‘s market collapse. MiCA should eliminate these problems and make the crypto market more reliable and stable. A particular problem is imbalances in lending regulation and participation in the European Union. The traditional banking system in Europe is at an asymmetric disadvantage compared to the relatively loosely regulated crypto market. Regulators place more stringent rules on commercial or investment banks, traditional fintech companies, than on crypto exchanges, lending, and investment platforms.

In the EU, at least one comprehensive legal document should become law, while the main effect of MiCA is more symbolic. Less ambitious legislative or executive acts could cover urgent issues in the crypto market. What effect will MiCA have? We will find out when its implementation begins.