Decentralised finance in MiCA’s era
For most social and economic situations, the consequences of a disruption in market conditions depend on one’s perspective. The European Council on Markets in Crypto Assets (MiCA) regulatory proposal presents the same property.
Understanding the value proposition of decentralised finance (Defi) is crucial to, grasping the reason for MiCA’s implementation and foreseeing its potential impact on the digital asset space.
Defi leverages the automation capabilities of smart contracts living on a distributed ledger to enable financial services without intermediaries. In contrast to traditional finance, where transactions are facilitated by trusted intermediaries in charge of market making, decentralised finance allows individuals to trustlessly exchange value with scalability, time indifference, and no regard for location, all without relying on a centralised entity.
In today’s financial market, financial security and stability are ensured by limiting access to identified and financially strong actors. Defi promises an open economic market where anyone can participate while maintaining ownership of their assets.
The open character of the space, the lack of education about best practices, and the presence of immature governance mechanisms and economic incentives is an “aubaine” for malicious actors. The hype and complexity around this market results in consumers being drained of their funds after investing in scam projects. Self-sovereignty also means accountability. Therefore, individual market participants must be alert to the soundness and intentions of the parties they interact with.
MiCA is trying to protect consumers and ensure financial stability by imposing the establishment of regulated intermediaries in the crypto asset market. In short, MiCA requires 1) Crypto Assets Services Providers (CASPs) to be incorporated as a legal entity in an EU member state and authorised by designated regulators to operate in the European Economic Area (EEA). 2) Token issuers to adopt minimum marketing and white paper publication requirements and to be incorporated (with some exemptions). 3) Stable coins issuers to be incorporated, authorised, and compliant with capital requirement regulation. Additionally, it demands custody of users‘ assets with either a traditional financial institution or a regulated CASPs.
The regulation sets the foundation of a regulated digital asset ecosystem, creating the necessary conditions to prevent fraud, insider trading, and price manipulation, all while ensuring compliance with Know Your Costumer (KYC) and Anti-Money Laundering (AML) requirements. This harmonisation across EU member states aims to reduce uncertainty and increase crypto-asset adoption for more traditional investors. Moreover, MiCA creates a clearer environment for creators to access the market and forces new projects to issue compliant documentation, enabling better investor decisions.
MiCA allows incumbents to play a more predominant role in this new era, as traditional financial institutions will not need additional authorisation to provide crypto asset services. Considering the cost and time required to comply with MiCA requirements, this will drastically reduce the competitiveness of small players and newcomers. Besides, depending on the time regulators need to evaluate and validate licences, new projects might lose their market timing or run out of cash before being able to operate.
Although the regulation minimises customers‘ risks when accessing the crypto assets market, the MiCA proposal wipes out two essential features of decentralisation: „no single point of failure” and „censorship resistance.“ In addition to creating barriers for players that want to develop and participate in the ecosystem, these properties may decelerate innovation in the space. The severity of these barriers will depend on how the regulation proposal evolves and who will supervise its application — considering its current direction, regulated entities acting as market gatekeepers will put the European market at risk for open innovation.
A centralised environment achieves security through participant authorisation, while the decentralised one reaches this goal through empowerment. Both settings have drawbacks, and the preferred habitat is about consumer preferences. Therefore, maybe the choice should be left to us.
Veröffentlichung: 17. Oktober 2022