MiCA, or Markets in Crypto Assets regulation, is a transformative change in the European Union that provides regulatory clarity for digital assets that are not deemed to be securities. As the market is quite large, MiCA should help boost crypto innovation in the region—something other regions, like the US, have struggled to accomplish.
Recently, CI connected with bitFlyer CEO Ami Nagata and Ajinkya Tulpule, bitFlyer’s General Counsel and Authorized Manager, to get an update on their opinions of the MiCA legislation.
bitFlyer is a crypto exchange based in Japan but it is also licensed to operate in multiple states in the US – including under New York’s virtual currency license issued by the New York State Department of Financial Services. In Europe, bitFlyer is licensed by the Luxembourg Ministry of Finance.
In Japan, bitFlyer claims to be the top Bitcoin trading market for the past six years. Just last week, bitFlyer announced that it had surpassed one trillion yen (~ $6.5 billion) in total assets under custody – the first crypto exchange to do so in Japan. The total amount of crypto assets under custody in the entire industry has been reported at 2.62 trillion yen as of the end of September 2024. Therefore, bitFlyer’s assets under custody accounted for approximately 30% of the total. The recent presidential election in the US is expected to boost interest in crypto trading as interest in digital assets rises.
We asked bitFlyer to outline the critical aspects of MiCA from their point of view.
“MiCA is an EU-wide legal framework focused on one of the most successful use cases of blockchain technology, i.e., crypto-assets. Crypto assets are a significant sector within financial services that has remained largely unregulated. MiCA harmonizes regulatory oversight for market players while protecting consumers and ensuring market integrity. Although MiCA applies to most crypto-assets, it does not apply to DeFi projects or to crypto-assets that are NFTs, CBDCs or securities.”
Tulpule noted that MiCA dovetails with the EU MiFID rules (Markets in Financial Instruments Directive) and has detailed provisions on prudential and operational requirements such as governance, conflicts of interest, safeguarding customer assets and preventing market abuse. MiFID is a European initiative that aims to harmonize regulation for investment services in the different EU member states.
How will this impact the digital asset ecosystem in the EU?
Tulpule explained that “armed with an EU-wide license to offer crypto-asset services, market players will be able to scale up across the EU and access traditional banking and financial services to reach their goals.”
He added that “the recently introduced Instant Payments Regulation and other similar international initiatives are aimed at creating cross-border real-time (i.e., instant) payments. Crypto-assets, however, are real-time (instant) by design and do not rely on any intermediary.” He believes that crypto is an enabler for the EU’s broader digital ambitions.
Nagata said, “fewer intermediaries result in lower transaction costs for banks and for customers. This shows that blockchain technology and crypto-assets were made for the next stage in the evolution of financial services.”
While MiCA is pan-European, individual member states still may have certain nuances. We asked if they foresaw any one EU country benefitting more from the new rules.
Nagata explained that although MiCA harmonizes the application of the legal framework, EU member states with financial centers or tech hubs will draw early benefits.
“This is because crypto-asset services would still need to plug-in to traditional and existing services and infrastructure. bitFlyer Europe has a strong presence in Luxembourg which is where we believe MiCA will also be most impactful in the short run.”
Stablecoins may be the biggest winner in a regulated ecosystem for crypto. Stablecoins represent the newest form of value transfer that aims to provide a better service for lower cost. While most stalbeoincs reference a specific fiat currency, there are other stablecoins that are linked to other assets.
Tulpule noted that under MiCA, stablecoins are categorized as either asset-referenced tokens (ARTs) or e-money money tokens (EMTs). EMTs are those referenced to one official fiat currency, while ARTs are those crypto-assets that refer to multiple assets such as official fiat currencies, commodities, and other assets. Beginning 30 June 2024, MiCA requires EMT and ART issuers to be authorised and to ensure the relevant crypto-asset white paper is approved by the national regulator.
Nagata said that, from a commercial standpoint, stablecoins lie at the core of the crypto-asset sector.
“Industry data shows that in 2023, on-chain transaction volume topped USD 10 trillion, where stablecoins contributed up to 60% of that figure.”
One area not covered by MiCA is digital securities or tokenized assets for investing. Asked if the digital securities sector was even more important than non-securities crypto, Tulpule said that MiCA closes a gap in the existing regulatory framework.
“Crypto-assets falling within the spectrum of “security” are controlled by an established legal framework under MiFID. However, before MiCA, there was no clear direction on how market participants should treat crypto-assets that are not securities. As a result of this regulatory uncertainty, many financial institutions refused to touch crypto-assets in their entirety.”
He added that “there is a fine line between these two categories and any assessment of whether a crypto-asset is a security must be fact-based. It is important to note that while MiCA is an EU wide regulation, the power to determine whether a crypto-asset is a security falls solely with the national regulators.”
ESMA is expected to publish an opinion by the end of this year on how national regulators should perform their assessments and which factors they should take into account.
So, will more crypto firms look to establish a presence in Europe as regulatory clarity emerges?
Tulpule stated that MiCA requires legal entities seeking authorization to be established in the EU so they must have a presence in a member state.
“Establishing a presence is, generally, not limited to opening letter-box companies. It requires substance and central administration inside the EU, i.e. having relevant decision makers in the EU and having sufficient staff to carry out the entity’s regulated activities in the EU.”
Nagata added that “although MiCA does have an exception for reverse solicitation and also allows for the outsourcing of activities, these channels are being interpreted very narrowly. They are unlikely to serve as a basis for not establishing a presence in the EU.”
As has been reported previously, the Draghi Report raised concerns that Europe is falling behind when it comes to innovation and investment in risky ventures. Should Europe do more?
Nagata said the Draghi Report highlights critical areas where the EU can do better. The first is that Europe needs “to close the innovation gap with the US and China, especially in advanced technologies”.
“The report also points out that there is no EU company with a market capitalization over EUR 100 billion that has been set up from scratch in the last fifty years, while all six US companies with a valuation above EUR 1 trillion have been created in this period”. The Draghi report also states that there is no shortage of innovation within the EU; however, Europe is “failing to translate innovation into commercialization” and “companies that want to scale up in Europe are hindered at every stage by inconsistent and restrictive regulations.”
Both executives believe that through MiCA, Europe has a real opportunity to accelerate past its rivals and create a solid and positive industry trend.
“The EU should, however, create a more connected approach to regulation by ensuring consistency between rules on taxation, regulatory filings, and international treaties of the EU. bitFlyer remains firmly committed to its European presence and is well-positioned to contribute to the discourse and benefit from this momentum.”
