Last week at the Digital Commonwealth’s Mansion House Summit Series, Tom Kiddle, co-founder of Palisade – a digital asset custody firm, spoke about his opinion on MiCA. Palisade is a regulated firm based in France.
The European Union has approved MiCA, or Markets in Crypto Assets regulation. MiCA aims to regulate all digital assets that are not deemed to be securities.
As for digital securities, the European Securities and Markets Authority (ESMA) is conducting a consultation on the classification of crypto-assets as financial instruments. ESMA accepted feedback until the end of April and expects to respond to the consultation by the end of 2024.
Kiddle shared some of his comments at the event, the good and some of the challenges which need to be addressed.
As for MiCA, Kiddle believes that brining crypto under AML/KYC rules under the fifth money laundering directive (5MLD) was a good start but running a financial services firm involves more than just AML
“In the traditional fiat world, important governance arrangements help firms make decisions in the best interests of their customers. Some governance-related controls also ensure business stability. These include financial risk management or maintaining robust IT infrastructure to reduce vulnerability to hacks,” says Kiddle. “MiCA is essentially about applying the standards expected of banks to the crypto world.”
He explains that it can be argued that both fiat and crypto function as money. At the same time not everyone agrees with this opinion, but “why shouldn’t crypto be afforded the same protections?”
“The core of MiCA is built around consumer protection in various ways. Its primary message, ensuring customer safety, aligns with what any legitimate company should prioritise anyway.”
This leads to the concern as to whether, or not, MiCA can effectively protect consumers – particularly risks associated with tokens.
“Since many tokens are assets or securities, the average retail investor may still struggle to fully understand the risks, even with mandated whitepapers. The clarity and quality of these documents depend on the entities writing them, and inadequate explanations could lead to poor investment decisions. A stronger focus on consumer education, especially on the risks, volatility, and long-term prospects of crypto investments, may be necessary.”
While MiCA does provide clear definitions for cryptocurrencies, utility tokens, asset-referenced tokens (ARTs), and stablecoins, Kiddle says it is less clear on the future of assets such as NFTs or meme-coins. In the US, there was recently an enforcement action against an NFT platform that was deemed to be operating as a securities firm.
“Although truly unique and non-fungible NFTs are excluded from regulation, there are potential grey areas where certain token types might not fit neatly within existing categories. This lack of clarity could create regulatory challenges,” Kiddle states. “Additionally, these assets, along with DeFi, carry similar risks of investor loss, yet DeFi remains much harder to regulate effectively.”
Kiddle says there may emerge a “MiCA II and the success, or failure, of MiCA will define any development of crypto 2.0 in the EU.
While centralised assets (CeFi) are a starting point for MiCA, likely, regulators have also begun examining DeFi, and other digital assets like metaverse-related tokens and assets for inclusion, meaning that the scope of MiCA II could be much broader. But these more esoteric topics can bring greater regulatory challenges and this means more time for policymakers to understand new developments.
Kiddle also worries about geopolitical strife and less regulated digital assets which could draw greater scrutiny over sanction avoidance and money laundering. He says policymakers may limit their approach to “PSAN (Prestataires de Services sur Actifs Numériques) or MLR (Money Laundering Regulation) registration.”
“Though speculative, as seen with other regulatory efforts, MiCA II may also need to create frameworks that facilitate cooperation and alignment with other major jurisdictions,” adds Kiddle. “This would help prevent regulatory arbitrage while promoting global standards for crypto-assets, particularly in areas of trade and financial crime.”
