The European Union has become the first major jurisdiction to pass a comprehensive crypto law, the Markets in Crypto-Assets (MiCA) regulation, which aims to provide legal certainty for the crypto industry and investors by establishing standard regulations and harmonized rules at the EU level.
MiCA may ultimately stifle innovation, impose a one-size-fits-all approach to regulation for decentralized finance (DeFi), increase compliance costs for decentralized exchanges (DEXs) and DeFi platforms, raise privacy concerns, and necessitate collaboration between the crypto industry and regulators to strike a balance between regulation and innovation.
By enforcing a one-size-fits-all approach to regulation for DeFi, MiCA may hinder innovation, as it may not take into consideration the unique characteristics of decentralized systems. Higher compliance costs could be incurred by DEXs and DeFi platforms as a result, which would reduce their ability to innovate and offer new products and services.
The Dodd-Frank Act in the United States and other similar regulations in traditional finance have faced criticism for their negative effects on innovation. For instance, it made it difficult for smaller banks and financial institutions to compete with larger ones due to the increasing regulatory requirements and compliance expenses. As a result, the number of community banks has decreased, and the banking industry has become more concentrated.
Similarly, MiCA’s restrictions can make it difficult for smaller DeFi ventures to enter the market, preventing industry consolidation. The fundamental tenets of DeFi — which aims to offer a decentralized, open, permissionless financial system — may also be compromised by the enforcement of MiCA’s laws on decentralized networks.
Increase in compliance costs for DEXs and DeFi platforms
As noted, the implementation of MiCA is expected to increase compliance costs for DEXs and DeFi platforms operating in the cryptocurrency market. The MiCA regulation will impose a set of rules and regulations on DEXs and DeFi platforms to ensure consumer protection, prevent money laundering and maintain market integrity, much like in the traditional financial sector, where regulatory compliance requirements can be costly and time-consuming.
Traditional financial institutions have traditionally incurred a large cost for regulatory compliance, especially in the years following the 2008 financial crisis. Banks, insurance companies, and other financial organizations now have to pay more to comply with new regulatory frameworks like Basel III and the Dodd-Frank Act. Included in the price of compliance are staffing, technological and potentially expensive legal costs.
Similarly, the MiCA regulation is expected to raise operating costs and potentially limit the entry of new players into the market. The impact of these costs on innovation and competition in the cryptocurrency market remains to be seen. The demand for regulatory compliance can, however, operate as a barrier to entry for new companies and restrict the ability of smaller businesses to compete with larger, more established players that can better absorb these costs.
Due to the MiCA regulation’s requirement that crypto-asset service providers gather and keep a sizable amount of personal data — including users’ identifying information, transaction history and other sensitive data — privacy issues will also be raised. This data gathering may result in privacy violations and increase the susceptibility of cryptographic assets to hackers.
Traditional financial laws, such as the U.S. Bank Secrecy Act (BSA) and the EU’s General Data Protection Regulation (GDPR), have been the subject of similar privacy concerns. The stringent data protection standards of the GDPR have drawn criticism for placing an undue burden on businesses, driving up compliance costs and stifling innovation. The BSA has also drawn criticism for requiring financial institutions to comply with onerous reporting requirements that can be costly and time-consuming, as well as for potentially putting customers at risk of privacy breaches due to the collection and storage of their personal data.
The extensive data collection and storage requirements in the case of MiCA may subject users to privacy violations and the exposure of their personal information. Due to the additional costs associated with complying with the law, smaller firms may find it challenging to compete with larger corporations that can afford to do so. Additionally, this might prevent the crypto sector from innovating.
With laws like MiCA, authorities should consider striking a balance between the necessity for privacy protection and innovation in the crypto business.
Guneet Kaur joined Cointelegraph as an editor in 2021. She holds a Master of Science in financial technology from the University of Stirling and an MBA from India’s Guru Nanak Dev University.
This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.