Analysis: the new MiCA regulation protects the customer by seeking to close down nearly all the scams carried out using crypto assets
By Mubashir Husain Rehmani, MTU
Shares, stocks, bonds, derivatives and real estate property are some examples of conventional investment products available to the public to grow their money. According to an April 2023 survey from the Banking & Payments Federation Ireland (BPFI), stocks or shares are held by 15% of adults, while cryptocurrencies are held by 8%.
On the one hand, crypto assets are gaining popularity as an alternate investment product. But on the other hand, the Central Bank governor believes unbacked crypto assets are more like Ponzi schemes than investments. European consumer group BEUC complained to the European Commission that the online platforms allegedly facilitate the misleading promotion of crypto assets, thus making customers more vulnerable to lose significant amount of money and become victims of scam.
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From RTÉ Radio 1's The Business, financial advisor Paul Merriman on the new EU legislation around cryptocurrencies
Let's take the case of a fictional customer called Alice. She lives in Limerick and invested a portion of her savings in cryptocurrency. After a few months, the cryptocurrency project liquidated, or the crypto exchange collapsed. Alice has nowhere to go, no place to complain, and her investment was lost. As a customer, she had no protection available to her.
Existing regulations such as Markets in Financial Instrument Directive and Anti-Money Laundering Directive are not sufficient to regulate crypto assets. They do not protect customers, provide level playing field to companies, trace transactions, ensure market integrity, identify customers or prevent, and combat money laundering or the financing of terrorism and organised crime.
Enter the Markets in Crypto Assets (MiCA) regulation. This defines a crypto asset as "a digital representation of a value or of a right that is able to be transferred and stored electronically using distributed ledger technology or similar technology". Some examples of crypto assets include unbacked cryptocurrencies (Bitcoin, Ethereum, XRP etc), backed cryptocurrencies or stablecoins (USDT, USDC, BUSD etc), non-fungible tokens (NFTs), DeFi tokens, coins, and various other utility tokens.
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From RTÉ Radio 1's Drivetime, interview with Michael Flynn from FLI Group who is helping a Welshman who €120 million of Bitcoin
MiCA's scope is clear: it classifies crypto assets into asset references tokens (ARTs), e-money tokens (EMTs), and utility tokens. MiCA’s classification of crypto assets is based on how these crypto assets stabilize their value. For instance, EMTs aim to stabilize their value by referencing only one official currency of a country.
ARTs aim to stabilize their value by referencing another value or right, or combination thereof, including one or more official currencies – simply speaking, ARTs are backed by assets. The issuer of the utility tokens provides access to a service or good through utility tokens. In cases where the crypto assets are fully decentralised, or representing services or physical assets that are unique and non-fungible, they should not fall within the scope of MiCA.
MiCA identifies the role and responsibilities of the issuers of crypto assets or crypto asset service providers. Moreover, market abuse strategies have been clearly discouraged and rules are made. The regulation empowers regulatory authorities to conduct investigations against issuers of significant ARTs and EMTs, perform on-site inspections and impose a fine. Complaint handling procedures, marketing campaigns, and right to withdraw within 14 days are now in place.
EU governments want to show they do not support trading and investment activities of unregulated and unbacked crypto assets
Until now, anyone can launch a new cryptocurrency, issue and trade a token, gather money from the public through Initial Coin Offerings (ICOs) and then flee. MiCA severely restricts this and the person who offers ARTs to the public can be a legal person or a credit institution and authorized by competent authority. Moreover, the white paper of ARTs clearly identifies the information of issuer of ARTs, risks, reserve of assets, impact on climate etc. This clearly protect the customer by closing down nearly all the scams carried out using crypto assets.
Crypto defenders claim that MiCA means cryptocurrency will be regularised and flourish more in EU, but this is not true. By no means does MiCA regulation view cryptocurrencies like Bitcoin or Ethereum as legal tender, means of payment or exchange. Even in the presence of MiCA regulation, warnings by the central Bank of Ireland and European supervisory authorities remain valid.
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From RTÉ Radio 1's Today With Claire Byrne, Lory Kehoe from Blockchain Ireland and Coinbase and personal finance advisor Eoin McGee on crypto warnings from the Central Bank of Ireland
Consumers are warned on the risks of investing in crypto assets because crypto assets are highly risky and speculative and are not suited as an investment or as a means of payment or exchange. Moreover, consumers face the very real possibility of losing all their invested money if they buy these assets and consumers are warned to beware of social media influencers carrying fraudulent advertisements.
MiCA’s core purpose is clear: it deals with the decentralization and anonymity of existing cryptocurrencies by bringing certain types of crypto assets (ARTs, EMTs, and utility tokens) under centralized authorities, removing anonymization and overcoming the risks and issues pertaining to decentralized cryptocurrencies to some extent. It's a great setback for such decentralized cryptocurrencies as Bitcoin. By enforcing MiCA regulation, it seems that EU governments want to pass a message that they do not support trading and investment activities of unregulated, unbacked, so-called decentralized crypto assets.
Dr Mubashir Husain Rehmani is a Lecturer in the Department of Computer Science at Munster Technological University (MTU)
The views expressed here are those of the author and do not represent or reflect the views of RTÉ
