EU’s MiCA law prompts debate on crypto security.

Recently, a controversial study was published by the European Parliament that challenges the rationale behind new European Union (EU) crypto laws. The study, conducted by a panel of academics, argues that crypto should not receive special, lighter rules and should instead be treated under a more heavy-handed regulatory regime designed for traditional stocks and bonds. The authors of the study believe that regulators need to act soon to control bad behavior that has been recently revealed and worry that the EU’s much-hyped Markets in Crypto Assets regulation, MiCA, has so many loopholes that it will offer few benefits and could create a regulatory vacuum.

Although the study was commissioned by the European Parliament’s Economic and Monetary Affairs Committee, it has no formal status within EU policymaking. According to some, lawmakers would have to reverse new legislation even before the ink is dry if they were to take the study’s findings into account.

The debate over the legal status of crypto is particularly thorny in the U.S. The Securities and Exchange Commission (SEC) Chief Gary Gensler has not yet said whether major crypto assets such as ether (ETH) constitute securities. However, a Monday lawsuit from the agency against Binance, the world’s largest crypto exchange by market capitalization, claimed that a range of tokens for blockchains including Solana (SOL), Cardano (ADA), and Polygon (MATIC) do fall under SEC jurisdiction.

Classifying crypto as traditional financial instruments could obstruct MiCA’s goal of having a single license to trade across the bloc, as different parts of the EU have a different view about what constitutes a security. Plus, it wouldn’t stop the kinds of bad events seen recently in crypto markets. For these reasons, many believe that crypto should be treated as a special asset class and have tailored regulations that reflect its unique qualities.

Under MiCA, issuers for crypto get a lighter touch – unlike for traditional financial instruments like stocks, they won’t need regulators’ advance permission to publish a white paper for investors. This approach has won plaudits from the industry, as crypto has a different technical setup than traditional finance and requires many differentiations within the regulatory setup. Despite this, concerns remain that MiCA has too many loopholes and could create a regulatory vacuum, leaving regulators unable to control bad behavior within the industry.

It’s difficult to imagine that EU lawmakers will completely change their minds on legislation that has already been drafted for years and signed into law. However, Zetzsche is not alone in expressing concerns about how MiCA might work in practice.

Gerry Cross, director of financial regulation, policy and risk at the Central Bank of Ireland, said in a May 30 speech that he was “particularly concerned” about ensuring coordination and consistency in implementing MiCA across the EU’s 27 national jurisdictions. He argued that one regulator might reject a crypto model that another accepts, allowing companies to effectively choose their favorite.

“We believe that there is a real risk of suboptimal results if this is not given the attention it deserves starting now,” Cross said, calling for the EU’s banking authority to establish a new mechanism to coordinate crypto applications.

Although the text has been finalized, MiCA still raises a number of issues. However, Patti says it shouldn’t be innovative startups hoping to launch a new business idea who pay the price.

“If you ask for regulatory approval first and face an authority that cannot address the issue, you have the same problem,” Patti said. “It is therefore better to help national competent authorities with clear standards, instead of claiming that everything is a security by default.”

Edited by Sandali Handagama.

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