Why the EU Has MiCA and the U.S. Has Securities Law Confusion

The European Parliament went ahead and did it: Today, after years of deliberations and at least two official delays, the landmark Markets in Crypto-Assets (MiCA) regulatory framework was voted in. European Union legislators also passed a separate crypto-related rule known as the Transfer of Funds regulation that imposes stronger surveillance and identification requirements for crypto operators, CoinDesk’s Jack Schickler reported.

The rules were described as a “world first” by the European Commission’s Mairead McGuinness, and also an “end of the Wild West era for crypto assets,” according to Green Party lawmaker Ernest Urtasun. The laws, which will be enforced at the state-level, still need to be officially approved by the supra-governmental body called the EU Council, are just about cleared to take effect next year. (The Council’s approval is more of a formality at this point, considering it already approved the text of the law last year.)

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For many, MiCA represents a crucial step forward for the crypto industry. It’s the first major attempt to provide a comprehensive set of rules for crypto companies so they know in advance what they can and cannot do and where their responsibilities lie if they want to operate in the 27-nation strong trading bloc. The European Union hopes it sets the global standard (and, in some sense, is worried about MiCA’s effectiveness in the EU if similar rules are not adopted everywhere).

CoinDesk has written a number of overviews of the legal framework. But. in short, MiCA requires crypto firms – like wallet providers and exchanges – to be licensed by the EU, and comply with money laundering and terrorism finance safeguards if they want to serve EU-based customers. Some have balked at the reporting standards, which will undoubtedly weaken privacy for crypto users in the name of customer safety and national security.

But considering how regulatory uncertainty has damped the crypto industry’s ability to grow over the past decade (that’s been a recurring line from crypto lobbyists and advocates), the move brings some amount of welcomed transparency and stability. Binance CEO Changpeng Zhao tweeted his support, calling MiCA “a pragmatic solution” with which his exchange will comply.

All this is in comparison to the two other massive crypto markets – the U.S. and China. At least on paper, China has officially banned all crypto activity – but recent smoke signals suggest that freeze could thaw (at least in a Hong Kong financial sandbox). The country has not been able to stamp out crypto trading or mining entirely, and legitimizing some portions of the industry could be a boon for those looking to return.

Meanwhile, in the U.S. there seems to be a coordinated effort of elected representatives, unelected regulators and policymakers of both major political parties as well as the Federal Reserve and Biden administration to get crypto out of the wider economy. It seems to be part of what President Joe Biden called a “whole-of-government approach” to dealing with crypto in an executive order at the beginning of 2022, before the worst excesses and calamities of the year came to light.

There are still authorities in the U.S. working to legitimize and regulate crypto, even if some high-powered officials like Gary Gensler, chairman of the U.S. Securities and Exchange Commission (SEC), are opposed to writing new rules. According to Gensler, the financial rules already on the books are clear enough to cover the novel peculiarities of decentralized tech. Political infighting between those who want to give crypto time to find its legs and those who prefer knee-capping it has left the entire industry worse for wear.

Right now, ether (ETH), the second-largest cryptocurrency by market cap and the native token of the Ethereum blockchain, is in a situation similar to Schrödinger’s security – stuck in a superposition of being both lawful and not, essentially because Gensler has said ether may and may not have fallen afoul of the Howey Test definition of a security.

Such legal insecurity has led the chief executive of Coinbase, the largest U.S. crypto exchange to say it may have to leave the country.You can say it’s an empty threat considering Coinbase’s business is built around extracting fees from U.S. customers, but Brian Armstrong is hardly alone.

In all fairness, Gensler is calling for common-sense oversight of increasingly powerful financial rails. Boil down what he wants – for exchanges to register with the SEC and bulk up their customer identification systems – and I’m sure it’s not too far off from the EU’s new standards. Of course, the difference between the EU and U.S. is that one took a “whole-of-government” approach to dealing with crypto, while the other merely says it will.

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