Disclosure: The views and opinions expressed herein are solely those of the author and do not represent the views and opinions of the crypto.news editorial.

All the talk is about the EU Cryptocurrency marketsor even MiCA, MiCA and MiCA. This package of regulations, not yet fully in place, is already causing a huge movement in the blockchain and crypto space. When will it be fully enforceable, what exactly is subject to the regulations and, more importantly, how to prepare for the upcoming legislative changes and remain compliant in the new world of regulated cryptocurrencies?

First of all, when? In June 2024, the European Securities and Markets Authority, together with the European Banking Authority, will prepare draft Delegated Acts. At the same time, part of the MiCA regulation will become fully applicable. These parts of the package cover asset-referenced tokens, which include all real-world asset tokenization tokens, and fiat-backed stablecoins, because the assets they reference are real currencies. When this happens, all entities involved in business operations using asset-backed tokens will be forced to introduce many regulatory measures, such as KYC and AML protocols. The remainder of the legislation will become applicable in December 2024 or January 2025. Regulated entities will include:

• Crypto asset service providers (CASP). Any company that provides services such as exchange, wallet management, or crypto asset custody services will be considered a CASP. They will be required to integrate KYC measures when onboarding new users, as well as AML programs that will flag suspicious transactions. One issue we need to mention is that many defi will also be considered CASP. MiCA will not apply to so-called “fully decentralized defi,” meaning no person or organization actually profits from such an endeavor, like Bitcoin. However, “partially centralized defi” will be considered CASP.
• Asset-referenced token broadcasters. These companies are already regulated by MiCA rules and must also introduce KYC and AML measures.

The obvious answer is, of course, to introduce KYC and AML measures to remain compliant in the EU cryptocurrency market. However, this process presents many obstacles, especially for crypto companies.

Developing KYC and AML protocols in-house takes months, if not years, and will cost the company millions of dollars. The largest banks in the world spend up to $500 million per year solely on KYC, averaging $50 million. Most cryptocurrency companies that already have KYC do so through different KYC providers. Just like any other B2B company, a KYC provider performs the entire process for you, allowing the customer to save resources and not spend them on a completely new business process. The current market situation shows us that turning to a KYC provider is the best solution in terms of optimization. Even the biggest names in the industry, such as Binance, Bybit, and Huobi, all use KYC provider services instead of managing them in-house.

Another barrier specific to the cryptocurrency market is data security. Many people have come to the cryptocurrency market for its built-in anonymity features and not having to undergo KYC. Not necessarily because they finance terrorism or launder money, but simply because they believe in data ownership and do not want to give sensitive information such as their home address or identification number to a third-party company. Explaining the benefits of MiCA rules and KYC/AML practices to that specific audience won’t be easy, so it’s a big challenge that crypto companies will have to overcome to retain users after the regulations are fully in place.

But what are the real advantages of the MiCA rules? Why are they introduced? Is it just because the government wants to control us even more?

I strongly believe that the MiCA rules will have a very positive effect on the EU cryptocurrency market, allowing it to be competitive with other regions that are actively introducing cryptocurrency regulations and allowing it to become the global crypto hub.

First, MiCA will replace the current regulations of several EU countries. Germany, Italy, Spain, France and other countries all have different regulations, with different travel rules, minimum transaction sizes without KYC and many other differences. This leads companies to spend additional resources to adapt their KYC and AML processes to each individual legislation separately. For example, Binance had to leave the Netherlands market because it was not possible to obtain the necessary license. With the new MiCA rules covering the entire EU, cases like this will not happen again, as companies will have to comply with a unified standard, making it much easier and cheaper to operate within the EU cryptocurrency market.

Another important thing to note is that MiCA bans things that are obviously dangerous and economically unstable. One of the biggest changes that regulation will bring is the total ban on algorithmic stablecoins. Simply put, there are two types of stablecoins: currency-backed and algorithmic. Currency-backed stablecoins guarantee their stable price by having funds locked in a 1:1 ratio. In other words, if there is 1,000,000 USDT in the market, Tether will have 1,000,000 USD locked somewhere, promising to buy back all that currency with the locked funds.

Algorithmic stablecoins, on the other hand, use market principles of supply and demand to maintain the target price. If the issuer sees that the stablecoin is losing value, it purchases part of the supply with other tokens. If you scale it high enough, the collateral tokens used to buy the stablecoins from the market will also start to lose value, or the company will burn the collateral tokens, which will eventually lead to the company not being able to take enough stablecoins from the market , and both tokens collapse. This is exactly what happened to UST e MOON, with the latter down 99.99%. Algorithmic stablecoins don’t work, and by banning them completely, MiCA regulations better protect investor funds.

Many people in the cryptocurrency industry are less optimistic about the upcoming regulations and have their points. The implementation of KYC and AML protocols will certainly increase the operating costs of crypto companies and, in the end, users will pay the price. Hiring a KYC provider, storing all the data and many other additional processes will be expensive, forcing companies to reduce costs elsewhere or increase rates and fees.

Another point to mention is security issues. If you do not have user data, it will not be hacked and disclosed. Many users are concerned about their privacy, claiming that even traditional financial organizations that have performed KYC for decades are still victims of cyberattacks.

I believe that these issues, while very serious, will be mitigated and resolved as the cryptocurrency market matures and processes are improved and tested. Fair and clear regulations are obviously the future of the cryptocurrency market and 2025 will be incredibly challenging and interesting for all cryptocurrency users.

Alexander Ray

Alexander Ray is CEO and co-founder of Albus Protocol, a regulatory-compliant definition framework for public blockchains, and JFactory, a Swiss company specializing in the development of decentralized financial technologies. Alexander is a technology executive and entrepreneur with over 20 years of experience developing cloud and data-based infrastructure and solutions for European businesses. Working for companies such as Deutsche Bank Frankfurt and General Electric as a software architect and development manager, Alexander was involved in the design and development of regulatory risk prediction models and financial data, which gave him deeper insight into algorithms and of DeFi tools from an old financial perspective. .

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