The Markets in Crypto-Assets Regulation, better known as MiCA, is the European Union’s new crypto regulation.
Although approved in June, it will not come into force until next year.
Consultations are currently underway and will continue throughout the first quarter of 2024, with the regulation coming into force between June and December 2024.
MiCA and DeFi
DeFi refers to decentralised finance, which is the set of financial protocols that reside and operate on decentralised networks based on blockchain or similar.
The point is that within DeFi there are no regulated intermediaries, not least because there are often no intermediaries at all.
Users who want to use these protocols can do so completely independently, without having to go through a platform managed by a third party, thus interacting directly with the protocol and the network on which it runs.
For this reason, according to BCAS, DeFi can be interpreted as being excluded from the scope of MiCA.
However, the BCAS experts point out that this is only true in the case of total decentralisation, i.e. when the protocol and network are not actually controlled by any person or company.
The fact is that there are some protocols and some blockchain networks that are in fact controlled by one person, which on the one hand makes them not fully decentralised and on the other hand makes the exemption from the scope of MiCA fall.
The European Commission is looking to produce a detailed report assessing the pros and cons of DeFi. According to Mark Foster, EU policy manager at the Crypto Council for Innovation, this report is expected in 2024.
So the fact that DeFi is excluded from MiCA as of today does not mean that it will be so forever, or that there will never be state-imposed rules on decentralised finance.
However, it must be remembered that in a truly fully decentralised system, states have very little power, because the actual DeFi protocols are just computer codes that execute instructions. In the absence of a controller, the DeFi protocols can do nothing and nothing more than execute those instructions. In this case, government intervention is completely ineffective.
So even if public rules are introduced in the future to govern the operation of decentralised finance, it will always be necessary to find a human controller to enforce them. If such human controllers simply do not exist, it will be virtually impossible to impose rules of conduct.
MiCA: the current situation
According to Foster, the decision not to include DeFi in MiCA was a conscious political decision on the part of EU politicians, as the size of the DeFi market is still considered small.
For example, considering only Ethereum, by far the largest network in decentralised finance, against a market capitalisation of $227 billion for the ETH cryptocurrency alone, the LTV of DeFi on Ethereum is limited to less than $24 billion.
In other words, DeFi on Ethereum is only worth a little more than half the value of the native cryptocurrency itself, giving a good idea that this is still a very limited market.
To use another metric, spot trading volumes on the world’s main crypto exchange are in the region of $7.7 billion per day, while on the main decentralised exchange they are just over $200 million.
So the current situation is that of a niche within a niche, which is probably why the EU has not yet started to take a serious interest in DeFi.
Instead, MiCa has focused on stablecoins and centralised exchanges, which are currently the two biggest areas of application for blockchain technologies.
In the future, however, these numbers will change, and the EU’s stance may change as well.
EU and US
Nevertheless, thanks to MiCA, the EU is becoming an area where regulatory clarity in crypto is particularly high.
It will have to wait until the second half of 2024 for this to become a concrete and objective reality, but many are already preparing.
By contrast, the United States of America seems to be standing still in this regard.
Not only have they not regulated DeFi (no one has yet), but they insist on using the old rules to try to regulate stablecoins and centralised exchanges as well.
In fact, regulatory clarity on crypto in the US is simply not there yet, and we may have to wait until the outcome of next year’s election to get a bit more certainty.
Paradoxically, the US is on the verge of losing the advantage it has largely gained in recent years if it does not take a step forward in regulating a fast-growing sector with great potential.