What’s missing from MiCA’s comprehensive crypto manifesto?

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In April 2023, the European Union published a comprehensive bill to finally get the crypto and blockchain sector under control. The Crypto-Asset Markets Regulation (MiCA) is a bold and pioneering initiative that aims to apply a unified regulatory framework to the sector and create clearer laws for crypto asset service providers and token issuers.

In what is seen as a milestone in the crypto regulatory landscape, MiCA recently approved a provision addressing stablecoins, which have long been considered complex assets to regulate due to their vague classification and widespread use in cross-border transactions. Following the approval of the provision, Circle, the issuer of the USDC stablecoin, became the first stablecoin issuer to be officially recognized as compliant under the EU’s crypto legislation.

Circle’s newfound status has led many to consider the implications it could have on MiCA’s $160 billion total stablecoin supply, as well as the broader crypto and web3 economy.

While the idea behind the most comprehensive attempt to regulate crypto is to protect investors by placing liability on the entities that issue and service digital assets, onboard new users, and encourage innovation while ensuring competition, it will take some time to gauge its full impact.

The idea for MiCA emerged from a wave of ICOs in 2017 and 2018 that raised concerns about scams, frauds, and other manipulations that could disrupt financial stability within the European bloc. After years of research, diligence, and good intentions, MiCA deserves a lot of credit for its approach of balancing regulation with innovation; a clear recognition of the technological and commercial advantages of crypto and blockchain. MiCA also promotes stability, investor confidence, transparency, and oversight through its comprehensive legal framework.

But MiCA has some blind spots.

While the regulatory framework recognizes the importance of bridging the gap between crypto asset service providers and traditional finance, it doesn’t offer much on how to make this a reality. Indeed, the increasing overlap of tradfi and digital assets bodes well for increased adoption and has likely contributed to a maturing crypto ecosystem, but MiCA introduces limitations that appear counterproductive to stablecoins.

Stablecoins not pegged to the euro are not allowed to be used in transactions for goods and services and face limits on the number of transactions per day (up to one million) and their total value (€200 million). This essentially imposes usage restrictions on the two leading stablecoins, USDC and USDT, even though they are certified as MiCA compliant.

Additionally, since stablecoins are so important in facilitating transactions, enabling defi, and revitalizing nearly every aspect of the industry, these restrictions could potentially impact liquidity and stifle innovation and defi activity, undermining a core pillar of MiCA’s mission.

These limitations are further compounded by MiCA’s lack of emphasis on interoperability, one of the industry’s most pressing needs, and its lack of interest in promoting crypto-fiat payment solutions—key ways to increase liquidity and spark innovation beyond crypto.

While it’s too early to tell how MiCA’s stablecoin approach will play out, Europe’s regulators can do more to future-proof its economy and prevent market fragmentation by promoting interoperability and cross-ecosystem payments. This can be improved by working with EU organisations such as Horizon Europe and the European Innovation Council to find innovative initiatives that address areas neglected by MiCA.

For example, Kima, an asset-agnostic, peer-to-peer money transfer and payment protocol, provides an interoperable payment layer for cross-chain and crypto-fiat transactions. By removing barriers between blockchains and traditional financial instruments and blockchain networks or decentralized applications, Kima’s protocol gives developers access to greater amounts of liquidity. This is also beneficial for non-crypto native users and financial institutions by allowing funds to flow in all directions.

MiCA will undoubtedly serve as the standard bearer for crypto regulation, providing guidance to other nations and economic blocs on how to regulate an evolving, complex, and volatile market that offers so much promise. In its desire to protect its monetary interests, it is important that the industry does not overlook other areas that impact its ability to grow.

The EU has shown a willingness to examine and adapt to emerging trends, and in the fast-paced crypto world, this is necessary to ensure appropriate measures are taken to protect investors and the integrity of the entire sector.