EU ‘Crypto Security’ Debate Turns New MiCA Law on Its Head

A controversial study published last week by the European Parliament appears to turn the rationale for landmark new European Union (EU) crypto laws on its head.

The study, by a panel of academics, denied crypto should get special, lighter rules – arguing that they should be treated by default under a more heavy-handed regime designed for traditional stocks and bonds.

Regulators need to act soon to control the kind of bad behavior that has been revealed of late, its authors say – and they worry the bloc’s much heralded Markets in Crypto Assets regulation, MiCA, has so many loopholes that it will offer few benefits, and could create a regulatory vacuum.

Though commissioned by the European Parliament’s Economic and Monetary Affairs Committee, the study has no formal status within EU policymaking – and, according to some, would require lawmakers to reverse new legislation even before the ink is dry.

Litigating to decide which side of the line a crypto asset lies on can be painful – as companies such as Ripple, Coinbase and now Binance have found. Treating crypto as a security is more painful still: financial laws often dictate that regulated products can only be traded on particular, registered markets; crypto is supposed to be used to buy things directly, over the blockchain.

Hence the rationale for a tailored regime. For Francesco Paolo Patti, an associate professor at Bocconi University in Italy, last week’s study is flawed and treats the application of securities law as a black-and-white issue when MiCA expressly creates a spectrum.

EU lawmakers “decided to do something different, to create a special set of rules” for crypto rather than tuck it into existing regulatory boxes, Patti told CoinDesk. “The existence of MiCA makes clear that crypto is special.”

Classifying crypto as traditional financial instruments could obstruct MiCA’s goal of having a single license to trade across the bloc – since different parts of the EU such as Italy and Germany have a different view about what constitutes a security, he said. Plus it wouldn’t even stop the kinds of bad events seen recently in crypto markets, he added, noting that FTX had a license in Cyprus to operate under the EU’s existing financial-market rules, known as MiFID.

Dirk Zetzsche, a professor of financial law at the University of Luxembourg who’s one of the study’s authors, brushes off those arguments, saying that traditional finance rules are needed as a safety net.

Zetzsche worries – based on what he says are private conversations with dozens of regulators – that there could, in practice, be a regulatory free-for-all under MiCA. Even the largest agencies would struggle to enforce rules against the approximately 10,000 crypto assets out there, and smaller jurisdictions simply won’t bother to probe or verify information, he told CoinDesk.

“Gathering the facts is costly for each case,” Zetzsche said in an email, adding that national authorities “will not invest these resources unless they have a good case in their jurisdiction, so it is a de facto waiver by way of non-enforcement.”

While the report cites a “Wild West” of decentralized finance – and points to recent collapses such as FTX and Three Arrows Capital – Zetzsche says his aim is to “allow honest, serious innovative participants to excel.”

“It is about crowding out the criminals and ignorant, and leaving the pros in the game,” he said.

Under MiCA, issuers for crypto get a lighter touch – unlike for traditional financial instruments like stocks, they won’t need regulators’ advance permission to publish a white paper for investors. That third way, in between treating crypto as securities or leaving them entirely unregulated, has certainly won plaudits from the industry.

“Dedicated rules are the only way to regulate crypto,” Christian Steiner, head of regulatory affairs at crypto exchange Bitpanda, told CoinDesk, as the dual status of currency and investment means existing rules don’t work. “Crypto has a different technical setup than traditional finance, that also requires many differentiations within the regulatory setup.”

It’s hard to imagine that EU lawmakers will entirely pirouette on legislation that is now, after years of drafting, signed into the statute book. But Zetzsche isn’t alone in raising concerns about how MiCA might play out in practice.

Gerry Cross, director of financial regulation, policy and risk at the Central Bank of Ireland, said in a May 30 speech he was “particularly concerned” about ensuring coordination and consistency in implementing MiCA across the EU’s 27 national jurisdictions. One regulator might veto a crypto model that another accepts, allowing companies to effectively pick and choose their favorite, he argued.

“We think that there is a real risk of sub-optimal outcomes if this is not given the attention that it deserves starting now,” Cross said, calling for the EU’s banking authority to set up a new mechanism to coordinate crypto applications.

Though the text is nailed down, there are indeed still plenty of problems MiCA raises. But, Patti says, it shouldn’t be innovative startups hoping to launch a new business idea who pay the price.

“If you ask first [for regulatory approval] and you face an authority, which is not capable of addressing the issue, you have the same problem,” Patti said. “It is therefore better to help the national competent authorities with clear standards, instead of claiming that everything is a security by default.”