The first stage of the European Union‘s Markets in Crypto Assets Regulation (MiCA) will come into play on 30 June. However, a new report by Acuiti, the management intelligence platform, and conducted by Eventus, the trade surveillance software provider, has found that a move to establish market surveillance systems is underway as firms find themselves underprepared.
MiCA represents one of the first comprehensive regulatory frameworks for crypto trading to be developed in a major financial jurisdiction, and its adoption will increase requirements for market participants in a range of areas.
The study, The Impact of MiCA on Crypto Market Surveillance: Insights and Challenges, was based on a survey and series of interviews with senior executives at 68 firms engaged in crypto trade across the buy-side, sell-side and exchanges. It found that, of the firms that were in scope for MiCA, just nine per cent were fully prepared, and a quarter of firms had not begun preparations.
With MiCA coming into full effect at the end of the year, it is important that firms identify whether they are in scope now and begin preparations to comply.
In terms of market surveillance, the MiCA regulation is based upon requirements set out in the EU’s Market Abuse Regulation (MAR). For many firms, particularly crypto-native firms coming into scope for the first time, there will be a significant operational lift to put in place the systems required to be compliant. This study found that there were still high levels of firms that were not sure if they were in scope.
“For firms that are not already operating under MIFID II, MiCA will present a significant operational lift to become compliant, and it is no surprise that we found that firms were looking to third-party vendors to assist them in their preparations,” says Ross Lancaster headof research at Acuiti.
“There is a relative lack of awareness among some areas in the market as to who is in scope, which will need to be addressed if firms are going to have time to get ready for compliance.”
Where are firms struggling?
The crypto market is already becoming more sophisticated when it comes to market surveillance, the report found with firms across the market, including 57 per cent of those that consider themselves not in scope for MiCA, already having market surveillance systems in place.
With consultations still ongoing on the final technical standards, one-quarter of those in scope had not yet started preparation. Just under a third were at an early stage of preparation, while just over a third were at an advanced stage.
Firms investing in new systems were typically looking at outsourcing to a third-party software vendor with 64 per cent planning to do so, although many firms anticipated challenges in finding the right vendor for their needs.
Of all the challenges that MiCA posed to firms coming into scope, the costs of compliance and finding skilled staff were the key factors that firms anticipated would cause them issues.
Eventus CEO Travis Schwab said: “While there are commonalities in trade surveillance across asset classes, digital assets can present some unique challenges. We invested significantly beginning several years ago in ensuring we could meet the needs of this sector, including the ability to handle real-time alert generation covering billions of messages per day, 24×7. Regulation in the EU is only the beginning of new regulatory guidelines we expect to see in jurisdictions across the globe in the coming years.”
Bitstamp confirms changes in accordance with MiCA
One organisation ensuring it is prepared is Bitsamp, the crypto exchange. The EUR denominated stablecoin EURT, will be delisted in advance of the June 30 deadline.
Furthermore, electronic money tokens (EMTs) which are not Euro-denominated and are already available on the exchange but not within MiCA regulation will not be delisted. Although, their availability to European customers will be limited on certain products.
Bitstamp will not list any new EMTs that don’t meet MiCA requirements, nor will it engage in any marketing of them.
James Sullivan, UK managing director at Bitstamp said: “We welcome MiCA’s implementation to make crypto regulation uniform across the European Union. As the world’s longest-running cryptocurrency exchange, we have consistently advocated for proportionate response to regulation which protects consumers while allowing for the ongoing maturation of cryptocurrencies as an asset class.
“Our commitment to compliance and security means we are in a strong position to adapt to these welcome changes. We are communicating directly with the small proportion of our customers whose asset mixes are affected.”
Struggles await following the first stage of MiCA
As firms gear up for the first stage of the regulation to come into place, Jason Allegrante, chief legal and compliance officer at Fireblocks, the crypto-asset custody solution provider, explains what hurdles they may face if preparations have not been made.
“Like many other jurisdictions, Europe is embarking on an experiment to bring digital assets and crypto market participants within the regulatory perimeter for the first time. There will be winners and losers as a result, but the ultimate hope is a more stable and resilient crypto market emerges over time.
“While I would expect differences in how companies have approached the regulation, it would be hard to characterise the adoption as sudden or unforeseen, meaning those that planned early and aggressively worked towards compliance will emerge as the primary beneficiaries of the implementation.
“MiCA provides broad guardrails for businesses and while many will know at a high level what they need to do, there are some ambiguities making compliance more challenging. However, the regulations are not finished. ESMA and other European authorities are in the middle of the process of issuing technical standards and other second order rules that should provide further clarification. Additionally, there needs to be further regulatory clarity around certain topics and business models, like NFTs and smart contracts.
“One area that the regulations currently get wrong is stablecoins. Creating standards for issuers and reserves is a good idea, as is closing the market to those issuers/instruments that do not meet minimum standards. However, MiCA also introduces caps on the amount of stablecoin transactions that can occur within a set period. This will prove to be a major impediment to adoption and a disadvantage to EU-based stablecoins if left uncorrected in the next iteration of rules.”
A calmer, more transparent market
MiCA’s implementation is not just a milestone in the regulatory landscape. It is also set to impact the crypto market in both short and long terms. Commenting on how MiCA will impact the market and other factors behind the recent volatility, Sergei Gorev, risk manager, YouHodler, the web3 platform said: “MiCA is only one of the first steps toward global crypto market regulation as the world moves toward complete transparency.
“In the short term, the market may experience non-trivial dynamics caused by the revision of risks in crypto investors’ investment portfolios.”
“We did observe increased volatility in the crypto market over the past few days, but I believe MiCA was just one of the multiple factors influencing the market. For example, a new group of derivative contracts on American exchanges expired last week. While such expiration happens every month, the June expiration practically coincides with the transition period of preparation for MICA.
“So, we observed a collapse in cryptocurrency quotes on Monday, June 24 – the first business day following the expiration week. Many people believed it was because of MiCA, but this drop was, in fact, much more complex, and MiCA was only one of the reasons for such risk review dynamics.”
Looking to the future
Gorev concluded: “As for the prospects of the market, with the introduction of more regulations, confidence in the cryptosphere as a whole will grow, but at the same time, investors’ incomes may fall because, gradually, volatility will decrease. It will become more and more challenging to capitalize on high volatility and earn thousands of percent.
“A decrease in volatility will lead to a quote increase of many cryptocurrencies. The market will become calmer, and the dynamics of investors’ income will be more linear. This fact will attract more large investors who are professionally involved in investments in the crypto market, which will fundamentally support the crypto industry.”
