In June 2023, the European Union (EU) introduced the world’s first ever regulatory strategy for the cryptocurrency sector – the Markets in Crypto-Assets (MiCA) regulation. It was a bold move and caused some contention. Not because there was any dispute over the need for regulation, but because the approach seemed unsuited to the innovation and evolution of the crypto space. Built upon the framework of regulation in traditional finance, MiCA is comprehensive and intended to protect investors. But some believe that it is too comprehensive, stifling the innovation that makes the sector so vibrant, while leaving significant loopholes which may prevent it from achieving its primary goals. The result is a European crypto market in a state of mild disarray… Which may work to the advantage of the UK’s crypto space.
What’s going wrong with MiCA?
I must start here by saying that there’s nothing inherently wrong with the MiCA regulation. The problem is that someone had to go first. So, while MiCA is a good first attempt, there are plenty of things for detractors to find fault with. And some of them are clearly more important than others. For me, that comes down to five key areas.
Regulatory technical standards
One of the reasons there was a huge amount of uncertainty surrounding MiCA is because its regulatory technical standards (RTS) weren’t published until the end of 2024, more than 18 months after the introduction of MiCA. This matters because these are the standards that operationalise MiCA’s framework, and without them it was near impossible to gain any insight into how it would work and what it would mean.
Industry development
This has been an overarching concern whenever crypto regulation has been considered. Although there is an indisputable need for regulation in the space, to tackle the opacity which opens so many doors to bad actors, there has always been the stumbling block of finding a way to do it without hampering growth, innovation, and evolution. MiCA hasn’t really achieved that – some question whether it even set out to. With the number of high level of requirements put in place, there are concerns that the invention that has always characterised cryptocurrency will be smothered. It’s become far too expensive to start a new crypto business in the EU. And in many areas, compliance simply isn’t affordable for the smaller crypto businesses and startups, meaning that many will simply be pushed out of the market, forcing entrepreneurs and investors alike to look to other territories. And this could have a knock-on effect on other sectors of finance and industry.
Permeability
Despite the fact that MiCA is being criticised for being too airtight, there are other questions surrounding its ability to continue to protect investors as the industry changes. So complex and intricate is the crypto sector’s ecosystem, that it’s no great stretch to imagine that any future development could easily find holes in MiCA to exploit.
Consumer detriment
In every industry, where new fees are levied against businesses, the costs are almost inevitably passed on to the customer. In most cases, this will be done stealthily, through fees and tariffs, but ultimately the end consumer will suffer.
Stablecoin rules
This last point is significant because while the new MiCA rules are comprehensive, they do not stretch to cover stablecoins – one of the most volatile crypto assets. And this is a really important oversight, because unstable stablecoins can potentially damage both the crypto markets and the wider financial system within the EU.
Together, these issues bring uncertainty to the EU’s crypto sector, which could potentially help enhance the UK’s position.
How could MiCA enhance the UK’s crypto standing?
The UK has never been a big cryptocurrency player, but interest is growing. As of late 2024, 12% of UK adults owned crypto assets, and there are around 40 registered crypto businesses. But with uncertainty surrounding the EU’s crypto markets, there comes the opportunity for UK businesses to scale – which is something my own business is doing. We’re based in the UK and Netherlands, but we have the ability to passport the license in other EU member states, enabling us to attract customers from other territories when their own country’s market is unstable. And we’ve already seen a notable inflow for customers.
On top of that, there’s the potential for the UK government to embrace MiCA as a learning opportunity. The Financial Conduct Authority (FCA) is known to be in the process of developing a comprehensive regulatory framework for cryptoassets in the UK. By looking at MiCA, they can clearly see what to include and what to avoid, making the UK’s future regulations more adaptive to the needs of a rapidly developing industry, while protecting against damaging elements, such as stablecoins and other core crypto activities.
The need for regulation in cryptocurrency is essential at this point, if we’re going to grow the market by welcoming in the non-crypto natives looking to expand their financial portfolio. It’s also integral if we’re ever going to see crypto accepted into mainstream banking. At the moment, the system is rife with fraud and conducive to exploitation on a breathtaking scale. It poses too much risk for traditional banks to consider integration. Regulation is a must. But MiCA isn’t necessarily the answer, and if the UK can come up with a viable alternative, it won’t just benefit from an increase in crypto investors in the short term, it could significantly bolster its position on the global crypto market permanently.
