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MiCA will funnel crypto-investment into the EU, but it misses an opportunity to boost the Euro’s international clout
In April the EU Parliament took a decisive step to end the crypto wild west. It formally passed the Markets in Crypto-Assets (MiCA) regulation, a comprehensive, first-of-its-kind bill that sets clear rules for decentralized cryptocurrencies. MiCA protects investors and the financial system at large. Moreover, it creates legal certainty for banks and companies issuing, holding, or trading crypto assets. This clarity is the bedrock for innovation and a vibrant economic activity. Without doubt the EU deserves credit for another pioneering piece of legislation comparable to its General Data Protection Regulation (GDPR). Yet in its current form MiCA also represents a missed opportunity to make the euro a more widely used medium of international exchange.
MiCA shines particularly bright because of the confusion currently engulfing the American crypto-world. Major US regulators are disagreeing even about the basic nature of crypto-assets, with some treating it as a security and others as a commodity. Gary Gensler, the chairman of the Securities and Exchange Commission (SEC), has called bitcoin a commodity but refuses to comment even on the status of Ether, the second-largest cryptocurrency. In a Congressional hearing on the oversight of the SEC some lawmakers did not only give him a grilling worth of Perry Mason, but openly pondered his removal. Meanwhile private companies like Coinbase are taking the SEC to court to obtain clarity on the status of crypto-assets.
The EU has avoided that kind of chaos thanks to the new regulation. But instead of complacently patting itself on the shoulder, the EU should see MiCA only as the first step of a continuous journey. Since the draft took time to work its way through the legislative process it does not cover more advanced crypto-concepts such as Decentralized Finance (DeFi) and autonomous lending. These practices caused much turmoil in 2022 and led to a massive erosion of wealth in the industry. Neither does the text include rules for other crypto assets such as non-fungible-tokens (NFTs). And thanks to the extreme dynamism of the space, we can expect that many more new concepts will keep popping up at a rapid pace, all of which will need to be included.
The stablecoin conundrum
Blaming such legislation for not being up to date with an emerging technology would be unfair, yet the real issue with MiCA is that it is too obstructive in one specific, but critically important regard. It gives neither the continent’s currency nor its companies the room to grow really big. European leaders routinely lament that the continent has failed to breed even a single tech giant. The digital age was driven by Silicon Valley and new breakthroughs such as ChatGPT are once more emerging in the US. MiCA is a prime example of a regulatory corset so tight it drastically curbs growth. The problem with the bill is in how it treats stablecoins. Most people have never heard about the concept but it will impact the future of money much more than the likes of bitcoin. Stablecoins are blockchain-based money issued by banks or private companies. Unlike cryptocurrencies they are run by a central authority and pegged to the value of a stable asset, which in most cases is a fiat currency like the euro or dollar. Stablecoins thus combine the promise of blockchains with the trust and stability of government-issued fiat money. Yet MiCA caps the size to which any such initiative can grow. Moreover, the central bank has the power to ban any stablecoin it deems too influential.
This is excessive. With stablecoins central banks still stay in charge of all levers of monetary policy; the issuers are simply making the currency more widely accessible. Successful private stablecoins thus wouldn’t put the European Central Bank out of business. On the contrary: They would strengthen the euro’s international standing.
In the past it was exactly such accessibility and ease of use that made the US dollar the most powerful currency in international trade. The euro could perform a similar trick by occupying the backbone of tomorrow’s financial system before others do so. To be sure, the next iteration of MiCA can and must regulate private stablecoins, for example by mandating its issuers to have deposit insurance or to hold adequate reserves. But putting a limit on how successful the product of a company may become effectively means killing any innovative drive. Yet this drive is exactly what the EU needs, because encouraging private innovation around the euro is what will make it strong.