What are the latest implications of Crypto Regulation in the EU?Dr Jane Nweikegives an update on the implications of MiCA and the impacts on crypto assets and distributed ledger technology (DLT). What does this mean for investment markets?Feel free to get in touch with us oncontactmkfintech@kyprianou.comfor further queries.
Introduction to Crypto-Assets
CRYPTO REGULATION
With the recent passing of the Markets in Crypto Assets (MiCA) Regulation into law April 20, 2023, it is helpful to refresh one's mind on the fundamentals of crypto to have a good understanding of how the regulation will impact the crypto industry.
What are Crypto Assets?
CRYPTO REGULATION
The MiCA Regulation defines 'Cryptoassets' as:
'A digital representation of a value or a right which may be transferred and stored electronically, using distributed ledger technology ('DLT') or similar technology'. This definition embraces a broad range of crypto assets some of which include:
- Cryptocurrencies
- Utility tokens
- Stablecoins
- Non-Fungible Tokens (NFTs)
- Central Bank Digital Currencies (CBDCs)
An explanation of DLT and how it works can be found here (MK Fintech Partners) and here (MFSA). DLT has also been shown to be applicable in the world of traditional finance to issue traditional financial instruments such as shares, bonds, and units of collective investment schemes. When issued using DLT, these financial instruments also qualify as crypto-assets.
How are Crypto-Assets Regulated?
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Different jurisdictions have different approaches to regulating the crypto industry. In the European Union (EU), various member states, prior to the MiCA Regulation, had put in place various legislation regulating the issuance of crypto-assets and crypto-asset service providers.
With the passing of MiCA, there is now a harmonized regulatory framework for crypto across the EU. In addition, the European Parliament has also put in place legislation to establish a pilot regime for the use of DLT in traditional financial markets.
In Malta, the Malta Financial Services Authority (MFSA) regulates the entire financial services sector, including the crypto industry.
Benefits and Risks of Crypto-Assets
CRYPTO REGULATION
Benefits of crypto include among others:
- speed and efficiency in executing and settling transactions,
- its decentralized nature,
- programmability using smart contracts to automate certain processes,
- its global reach, which allows value to be transferred across borders with little or no restrictions,
- Privacy (anonymity), traceability and auditability (transactions on public blockchains are open to anyone for reconciliation).
However, crypto-assets also carry their own risks, including volatility, the risk of hacking and cyber-attacks on crypto networks, and the risk of financial crime, as the anonymity crypto-assets offer makes them attractive to illegal actors.
Further Reading
The MFSA has been at the forefront of crypto regulation, with Malta being the first country to issue crypto legislation. The MFSA's Crypto Assets Finsights offers a good overview of the crypto industry!
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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