By Rajagopal Menon
The coming year is being highly anticipated by the Crypto community for a number of reasons. Bitcoin halving, a predicted bull run, clarity on regulatory developments by G20 nations and implementations of the IMF FSB framework, and MiCA coming into effect on December 30, 2024 which, as of now, is one of the first jurisdictions to set a specific regulatory implementation date. Crypto regulations across nations is at a stage where countries have the advantage of drawing inspiration from one another.
The European Securities and Markets Authority (ESMA) is an institution within the European Union (EU) that ensures investor protection and market stability. A comprehensive set of regulations for the Crypto market has been its area of focus in recent times which has led to the creation of Markets in Crypto Asset regulation or MiCA, a framework for Crypto service providers to adhere to regulatory standards. Its implementation is not just beneficial to the European Union but also to other countries who are in the process of drafting or revising their policies with respect to digital assets.
MiCA has addressed all areas of interest for stakeholders, starting from investor protection to prevention of market manipulation, and ushering in an environment of transparency in the industry which remains a stranger to most users worldwide. It has imposed strict standards for Crypto service providers which requires them to have legitimate authorization to operate in the market, comply with regulators, publish detailed whitepapers about projects revealing all aspects of its application as well as any risks that investors should be aware of.
When we look at such a thorough directive, we are bound to be impressed by the potential outcomes for EU residents as well as for hundreds of millions of users across the world who might be indirectly impacted by this. Though there have been criticisms of excessive scrutiny by authorities, one might argue that there are other facets that need detailed attention.
Alberto Garcia, Senior Officer at the European Securities and Markets Authority, recently spoke to Nasdaq about the need to emphasize on 3 factors such as Prohibition of Market Manipulation, Prohibition of Selective Disclosure, Prohibition of Insider Dealing, which all stand on the pillars of other crucial aspects such as collaboration between different regulatory bodies in the EU, clearly and specifically defining the role of authorities, defining insider information, all of which culminates to prevention of market abuse. This is mainly due to the fact that while the financial markets and the Crypto industry in the EU have a lot of regulatory aspects in common, adequate investor protection, and transaction reporting frameworks are inadequate in Crypto.
The lack of a robust transaction reporting system is what the EU can be expected to focus on in the coming months. It is going to be a priority for maintaining stability in the markets, preventing fraudulent transactions, and ensuring adherence to standards imposed by regulators. This is also going to be of paramount importance for boosting investor confidence. The supervision of transactions might be preceded by a specific set of criteria to determine what legitimate transactions are, according to regulatory bodies. This could change ESMA’s estimate of the number of Crypto projects who can qualify for Markets in Financial Instruments Directive – a set of rules to enhance transparency in the market, from only a small percentage currently. Besides this, there might be rules in place to provide detailed information about tie ups between various projects, tokenization, stakeholders and their interest in specific projects, all of which would determine the pulse of the investor towards deciding which assets to engage with.
ESMA has already taken care to not impose a blanket set of rules followed by traditional markets on Crypto businesses besides the ones that focus on their scope related to market manipulation, insider information trading, etc. This is because the scale of Crypto asset issuers and that of traditional market players are vastly different. Most Crypto projects are emerging entities with small or medium sized operational teams which could make the compliance process quite difficult considering the manpower needed to accumulate information and comply with information disclosure requests from regulatory authorities. This also sets the tone for tailor made standards of reporting for Crypto projects which might be built on the existing scope but more cognizant towards the businesses and their ability to adhere to the level of compliance that traditional finance has. Regulators at ESMA have a futuristic vision towards letting Crypto operators thrive and intend to reduce unnecessary bureaucratic intervention and hawk eyed scrutinization for these projects to grow and thrive. We might have a perfect example of the right mix of regulatory intervention and rapid innovation co- existing to foster the industry, before the MiCA framework is implemented.
There is also a strong hope for clarification on using Crypto assets as financial instruments. The EU will have to set out specific criteria for issuers of Crypto in order to understand whether they are eligible to be considered as financial instruments based on existing as well as evolving standards in the traditional markets. Regulated financial instruments might not meet the characteristics of Crypto assets and vice versa which brings the need to define the course of action for their classification. The EU has been quite vocal about adopting the underlying technology of Crypto in traditional monetary systems. It can be a great way to motivate TradFi and DeFi players to come up with innovative use cases for digital assets.
While risk mitigation is a primary focus of MiCA, it is equally committed to fostering innovation within the crypto space. Given the rapid evolution of this sector, a balanced regulatory approach is essential which seems to be on the agenda for the coming months. By clearly expanding and focusing on granular details of proposals in the framework, MiCA aims to instill confidence in businesses, motivating them to invest in the development of new products and services and driving the European crypto market forward.
The author is vice-president, WazirX