In a recent research, the European Parliamentary Research Service (EPRS) raised concerns for tighter oversight from non-European Union (AU) regulators to ensure more excellent stability and development in the global crypto market.
The EPRS report comes as the Markets in Crypto Assets Regulation (MiCA) Act continues on the road to implementation by December 2024, prompting calls for a more robust regulatory framework beyond the EU’s jurisdictions. The report emphasised that the main concerns were potential implications around financial stability, lower market appeal, and mainstream use of stablecoins.
The EPRS report underscores the significance of the MiCA Act and its implications on the EU’s financial system. The report noted, “There are yet several channels through which the EU’s financial system and autonomy is still at risk as it remains dependant on non-EU countries’ policy actions in the context where the MiCA is applicable.” The report pointed out that the EU’s financial stability and autonomy remain exposed to potential risks originating from policy actions taken by non-EU countries where MiCA regulations may apply.
The risk factor showed the need for international cooperation and standardisation in crypto law. The EPRS’s central concern revolves around the potential implications of regulatory fragmentation on financial stability. According to the report, divergent regulatory approaches across different jurisdictions were highlighted as they could lead to increased volatility and uncertainty in the global crypto market.
Furthermore, such uncertainties could have a negative impact on investor confidence and overall market appeal. The report also highlighted that divergent regulations could hinder the mainstream adoption of stablecoins, which have gained significant traction over the years. The lack of uniform regulatory standards for stablecoins could deter businesses and consumers from using them as a reliable means of exchanging stores of value. In the report, the EPRS singled out the United States (US) as a noble example of a fragmented regulatory landscape in the crypto space. The US crypto market is subject to a complex web of state-level and federal regulations, resulting in a lack of regulatory certainty and legal clarity. This fragmentation has the potential to impede the development and growth of the market.
UK’s Divergence from EU Regulation
The report highlighted the United Kingdom’s Financial Service and Markets Act, which is expected to diverge significantly from EU regulations concerning crypto-assets in the coming years between the UK and the EU. This anticipated regulatory gap between the UK and the EU could create challenges for businesses operating in both markets and lead to further fragmentation in the crypto regulatory landscape.
On September 18 2023, the Malta Financial Service Authority (MFSA) initiated a public consultation over changes to its crypto regulations. The move aims to align Malta’s regulatory framework with the upcoming MiCA regulations. The revised framework grants the MFSA enhanced oversight capabilities, including the authority to object to the appointment or replacement of required IT auditors for crypto firms. It can also mandate external reviews or audits of a company’s IT system.
Furthermore, the MFSA will be able to require companies to disclose the nature, scale and range of VFA services provided. According to the new guidelines, a contingency planning requirement was introduced last year in October, which entails that Licensed VFA service providers, including exchanges and custodians, must formulate a comprehensive plan. Early modifications are expected to help VFA licence holders seamlessly transition to MiCA-based laws and obtain the EU licence. Experts from Bitcoin Decode Official mentioned that Malta’s VFA framework was based on Markets in Financial Instruments Directive (MiFID) principles and MiCA, deriving several principles from the same rulebook.
On August 10 2023, France updated its crypto regulations to align with the forthcoming MiCA laws. According to the press release, the provision of its General Regulation and its policy on digital asset service providers (DASPs) will become obligatory starting January 1 2024. The enhanced registration requirements for crypto platforms, captured by a new article of the AMF General Regulation, will include:
• Systems for managing conflicts of interest.
• Additional disclosure obligations.
• Segregation of client and platform assets and prohibition to use client assets without their express prior consent.
The amendments must be taken into account by applicants for enhanced DASP registration. DASPs obtained before the due date will be subjected to the previous, simpler framework version. The EU Parliament approved MiCA in April 2023, which should come into force in three levels in 2024 and 2025. The legislation has taken tears to finalise and raised concerns amongst the community.
The recommendation by the European Parliamentary Research Service shows that the EU intends to remain at the forefront of crypto regulation, ensuring that its framework is not only robust but agile enough to adapt to the broader EU’s MiCA standards. With these recommendations, the European Parliamentary Research Service aims to notify its position as a leading crypto hub while adhering to the crypto regulatory landscape.