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Exclusively with crypto.news, Jón Helgi Egilsson, former president of the Icelandic central bank, explains how the European Securities and Markets Authority (ESMA) is entering the final phase of the regulation of crypto assets in the European Union (EU), and what this means for Cryptoasset legislation (MiCA).
The cryptocurrency market is increasingly rooted in the public sector. The need for a legal framework that ensures security, stability and trust is of utmost importance, and the latest MiCA regulations are hailed as the answer.
However, despite its importance, MiCA is mired in confusion and misunderstanding, particularly regarding its impact on stablecoins and their compliance requirements.
In an exclusive interview with crypto.news, Jón Helgi Egilsson, a figure well-versed in the complexities of financial regulation and the crypto landscape, describes what the market and MiCA regulations have in store for the crypto industry.
Egilsson, co-founder and president of Monerium and former chairman of the supervisory board of the Central Bank of Iceland, is in a unique position to shed light on the nuances of MiCA. Through his insights, crypto.news seeks to decipher its implications for the future of cryptocurrencies in Europe and beyond.
What is your position on the current state of the MiCA regulations?
MiCA addresses three types of assets; electronic money tokens (EMT), asset reference tokens and crypto assets. MiCA does not address nft or DAO. I have expressed my opinion before that specific technological legislation for electronic money implemented on blockchains is not useful.
You highlighted a common misunderstanding regarding the regulatory status of fiat-backed stablecoins in Europe. Can you explain the challenges that stablecoin issuers might face as they transition towards compliance with both the Electronic Money Directive and MiCA?
Many seem to believe that stablecoins will only become illegal once MiCA comes into effect. But that is a misconception. Fiat-backed stablecoins are already illegal under current e-money laws unless issued by authorized entities. Some issuers have simply chosen to ignore this and operate without authorization. This creates an unfair advantage over compliant issuers that have gone through the proper e-money licensing process. It is incredibly frustrating to see bad actors gain market share by disobeying the rules because the EU financial authorities are not doing their job. The real problem is law enforcement.
Both MiCA and the Electronic Money Directive (EMD2) apply to stablecoin issuers in certain circumstances. Given the potential overlap, how do you foresee this impacting the operational clarity of stablecoin issuers? Does this dual regulation approach benefit or complicate the stablecoin ecosystem?
What MiCA effectively does is confirm that digital cash offered within the EU should be regulated as electronic money. Nothing new there. However, it adds some provisions based on the claim that it is necessary due to the peer-to-peer nature of blockchain technology.
How can European regulators ensure fairness in the competitive landscape, given the advantage that American companies could have with less strict regulations? What steps are needed to balance innovation with fair competition?
The looser regulatory environment for stablecoins in the US gives US-based issuers a competitive advantage in the near term. They can bring products to market faster and with less friction than their European counterparts, who must deal with the stricter requirements of EMD2 and MiCA.
However, this advantage may be short-lived because US regulators are also looking to implement more comprehensive rules for stablecoins. In the long term, Europe's proactive and unified approach could prove beneficial, as compliant EU-based issuers will have access to the entire European market and enjoy greater legitimacy and consumer trust.
What about international regulations?
International coordination around stablecoin regulation would also help level the playing field globally. Regulators should collaborate through bodies such as the Financial Stability Board (FSB) to align principles and mitigate the risks of regulatory arbitrage. A race to the bottom on regulatory standards benefits no one in the long run.
A key area of focus in MiCA has been strengthening solvency requirements for stablecoin issuers. Regulators consider this essential to mitigate the risks associated with inherent volatility, even for stablecoins. MiCA requires a strict solvency standard that ensures stablecoins, often seen as safe harbors in the turbulent seas of cryptocurrencies, are backed by sound and reliable financial practices.
MiCA also addresses the issue of proof of creditworthiness among stablecoin issuers. How important is this aspect of regulation to stability and trust in the broader cryptocurrency market? Do you think the MiCA requirements are sufficient?
Proof of solvency is addressed in electronic money legislation and is paramount for financial services and financial stability. Under EU law, stablecoin issuers should be regulated as electronic money institutions. Electronic money issuers must comply with the supervision of financial authorities, maintain certain equity capital standards, etc.
What about unauthorized issuers of stablecoins?
Unauthorized stablecoin issuers could trigger a domino effect with far-reaching consequences. MiCA reaffirms that stablecoin issuances must be licensed e-money issuers and therefore maintain adequate reserves and undergo regular audits. These measures are crucial to building trust and stability in the broader cryptocurrency market. While the MiCA requirements simply reaffirm the existing legislation on the matter, i.e. continuous monitoring and strict standards. A strong and transparent regulatory framework is essential to avoid stablecoin failures that could destabilize the entire DeFi landscape, so it is strange that current EU laws do not apply.
Can MiCA serve as a model for balancing innovation with consumer protection and market integrity?
Striking the right balance between innovation and regulation is crucial for the healthy development of the stablecoin industry. While strict oversight is necessary to protect consumers and maintain financial stability, overly restrictive regulations could stifle innovation.
MiCA requires cryptoasset service providers to have robust governance arrangements, including transparent lines of responsibility and recovery plans. How do you think these requirements impact the operating models of CASPs, particularly smaller entities trying to navigate the regulatory landscape?
Like any business or sector, increased regulation will add friction. However, in most cases, the European Union's intentions with MiCA are to regularize digital asset companies and provide a clear framework for their operation. While the decentralization paradigm underpinning many crypto projects may not always align perfectly with regulators' desire for clear accountability, the overall goal of protecting consumers and promoting market integrity is well placed.
Looking ahead, how do you envision the overall impact of MiCA regulations on the cryptocurrency industry? Do you foresee other jurisdictions adopting similar frameworks?
I think the Electronic Money Directive (EMD) is a Brussels export standard that could certainly underpin a global standard for stablecoins. But regarding MiCA and how it creates e-money legislation specific to blockchain technology, I don't see the added value.
However, MiCA also addresses asset reference tokens and cryptoassets, which is the novel part of MiCA, not e-money. In addition to electronic money, MiCA is an important milestone in the regulation of digital assets due to its novelty and the attempt to regulate it. Its impact is likely to extend beyond the European Union.
As the first comprehensive regulatory framework for asset reference tokens and cryptoassets, MiCA sets a powerful precedent. If deemed successful, other jurisdictions may end up copying much of the regulation.
