The future of Crypto-Assets in a Regulated environment

The Market in Crypto Assets 

Over the past years, crypto-assets have reached over time a multi-trillion dollar market: at the time of writing the article the total market capitalization is now approximately 970 billion USD. The top 3 crypto assets, consisting of Bitcoin, Ethereum, and Tether, together represent approximately 623 billion USD.  

The global crypto asset market knows a wide variety of applications, such as peer-to-peer payments, retail, trading, e-commerce, and decentralized finance. New and innovative solutions are developed daily. The market capitalization is expected to reach a value of 32 trillion USD in 2027, according to the Cryptocurrency Market report of research company IMARC Group. Other forecasts also show similar potential growth.  

On top of that, upcoming legislation like MiCA is expected to make the market for crypto-assets more mature. This is particularly relevant for traditional institutional players, which will be able to set up a more calculated, trustworthy, and risk-responsible approach. 

Current Situation 

The current regulatory framework allows national regulators to remain fragmented, leading to increased compliance costs. For example, De Nederlandsche Bank requires a registration for crypto-wallet services and crypto-exchange services, but other EU countries go about it differently. Moreover, current legislation focuses mainly on AML/CTF, whereas the important aspect of consumer protection and prevention of market abuse is not getting much attention. In addition, due to the size of the crypto-asset market, there is an increased need to regulate crypto-assets to ensure economic stability. 

While navigating through the current complicated regulatory environment, several players are already active in the market for crypto assets throughout Europe. Some players have invested in technologies which developed the infrastructure and platform for institutional trading of crypto assets. Some banks are experimenting with on-chain bond tokens issued by the bank. A consortium of banks set up an infrastructure that allows other platforms to handle their crypto assets after trades have been completed. Some private banks launched separate services allowing their customers to buy and sell crypto assets.

MiCA specifics 

The agreement on the draft MiCA will support aforementioned initiatives and more. MiCA will provide common definitions and rule out ‘grey’ areas due to different terminology. The Regulation will harmonize regulatory requirements, supersede national rules, and should introduce a form of ‘passporting’ for acting across the EU without having to register separately in every EU country. The Regulation will also provide a safe environment for providers and users, will improve consumer protection, and impose stricter rules for the prevention of market abuse.  

Core requirements will apply to issuance of all crypto-assets, whereas stricter requirements apply to issuance of stablecoins (asset-referenced tokens and/or e-money tokens). AML/CTF legislation is not included in MiCA, so already existing legislation on AML/CTF is applicable to CASPs. This puts traditional FSIs (Financial Services Institutions) at an advantage because of their compliance experience.  

Issuers of crypto-asset services will be subject to several obligations, including the obligation to produce a whitepaper ahead of issuance, including liability for the contents of the whitepaper, incorporation as a legal entity, and authorization by a regulator. CASPs also need to comply with standard requirements and service-specific requirements, such capital requirements and organizational requirements, and requirements for the prevention of market abuse.  

After the provisional agreement between the Commission, the Council, and the Parliament, the MiCA is expected to be published in the EU’s Official Journal as of 2023, followed by an 18 month transition period before MiCA will take force. We think now is the time to act. There is sufficient clarity on the text of the MiCA to start acting upon it. Furthermore, it takes time to set up services in a responsible way and make an organization fully compliant. Early application will lead to a smooth authorization process and potentially receiving authorization faster. Early application will also create a competitive position. 

Risk Management 

Risk Management is key for the best approach to crypto. MiCA is taking steps in the right direction, but risks will of course continue to exist. This includes regulatory risk, the complicated relation between MiCA and traditional laws, reputational risk, and liability. Deloitte has developed a strategy that considers these risks and more, while providing support in implementing crypto-custody services, crypto-trade execution, or crypto-lending. Depending on your stage of maturity in adopting crypto-asset services, Deloitte has a tailored approach. We would be more than happy to start the conversation with you.