The EU’s MiCA framework is expected to increase transparency, but challenges remain for wider cryptocurrency adoption.

In 2023, the focus on digital asset regulation has risen dramatically. Many legal frameworks have been proposed for consideration around the world to improve the security and integrity of the industry. The EU’s adoption of MiCA is arguably the most prominent case.

However, while many countries have realized the importance of rules to create a safe cryptocurrency market, we are still far away from the wider adoption of digital assets.

Why is this the case? Let’s take a closer look.

The Current State of EU Regulation: How Does It Affect Crypto Adoption?

Regulation around cryptocurrencies is still in its developmental stages, as this market is so dynamic. Regulators still don’t have enough knowledge about its many sub-areas to formulate clear laws. Moreover, clear rules mean that different countries need to adopt a unified approach to crypto assets.

In the EU, these issues are expected to be addressed through the introduction of the MiCA (Markets in Crypto-Assets) framework, which will come into effect in 2024. The implementation of this framework will help strengthen the integration of cryptocurrencies with traditional finance, as MICA will maintain transparency and overarching rules across all areas of the crypto industry. This will include marketing, portfolio management, user verification, token issuance, stablecoins, etc.

The introduction of a unified authorization system across all EU countries through MiCA means that crypto projects will no longer need multiple licenses for different jurisdictions in the region. At the same time, TradFi players can check whether a crypto company has passed a regulatory check by an authority recognized by everyone. This means that dealing with CASPs will involve less risk, leading to greater cryptocurrency adoption.

Despite regulatory progress, challenges still hinder adoption

Despite the promise of MiCA, increased regulation also brings nuances. While the framework does aim to address issues such as money laundering and user protection, it also seeks to bring everything about cryptocurrencies into a centralized format. This type of regulation will mostly have a favorable impact on large market players. For decentralized services and smaller players, it could become a problem.

For example, let’s look at decentralized exchanges (DEX). As it stands today, there is no need to follow specific KYC/AML procedures. But in the future, through this approach by regulators, all decentralized services that interact with EU citizens will be subject to new requirements. Such a transition will be very sudden and potentially painful for these players.

Another outstanding issue is the implementation of the crypto asset travel rule. This means that payment provider services need to identify their customers and recipients when conducting transactions. In the TradFi space, this system is designed to combat illegal financial activities.

In order to implement the same measures in the cryptocurrency industry, European regulators must first develop the necessary mechanisms and software. Clear guidance on how cryptocurrency companies can integrate themselves into such a system also needs to be issued. However, so far, this is all just theoretical. There is no comprehensive solution for how this will work in practice.

Regulatory and operational frameworks: a symbiotic approach is needed

In the cryptocurrency industry, you can often see a split in opinions about the role of regulation. Some believe that an excessive focus on rules could stifle innovation and hinder the growth of the industry, so they advocate for a more hands-on approach to development. On the other hand, supporters of regulation believe that better rules are essential for market stability and building overall trust in cryptocurrencies.

I personally think both directions are necessary. Having a comprehensive set of regulations will also lead to practical applications. Mainly because different countries are able to develop technical solutions in a compatible way. In order to create such an environment, policymakers must work with cryptocurrency companies who directly create this environment.

This can be done in a number of ways. Public consultation on the implementation of new rules is a common practice for UK regulators. Another way is through partnerships with exchanges and other CASPs. Create hubs and working groups and invite experts from leading cryptocurrency companies to work together.

Take Hong Kong, for example. Earlier this year, local regulators encouraged commercial banks to provide services to licensed cryptocurrency companies and support their business needs. This attitude is currently driving Hong Kong to become one of the largest cryptocurrency hubs. This jurisdiction is not easy to operate in, but the willingness of regulators to get involved in cryptocurrencies still makes it very attractive to many parties. This is perhaps something other countries can strive to emulate.

The outlook remains distant as more factors need to be considered

Despite efforts by countries around the world to regulate cryptocurrencies, achieving widespread adoption remains a distant goal for a number of valid reasons. The crypto industry is large and complex, and establishing rules that apply to all participants is challenging. Most jurisdictions ultimately prioritize regulation within their own borders. That way, they can tailor practices to their unique circumstances and needs.

It is important to balance creating consistent rules and introducing an operational framework that enables companies to operate better within it. This is the only way to enable an ecosystem by encouraging innovation while maintaining the necessary safeguards. Once such an ecosystem is in place, cryptocurrency adoption will go much smoother. #欧盟  #MiCA