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ESMA's measures to address crypto risks amid MiCA implementation

The European Securities and Markets Authority (ESMA) is poised to implement the Markets in-Crypto Assets (MiCA) regulatory framework within a 12 to 18-month time frame since it entered into effect in June last year.

MiCA’s adoption marks a significant milestone for Europe’s crypto landscape. However, ESMA acknowledges that the regulation may not address all crypto-related risks, saying that MiCA is “no safe harbor”.

To address this issue, ESMA plans to gear up for MiCA’s implementation by establishing a comprehensive plan to address these crypto risks. ESMA’s measures aim to protect consumers and investors in the crypto market, particularly against risks on digital assets that may not be covered by MiCA’s regulatory standards.

“Even with the implementation of MiCA, retail investors must be aware that there will be no such thing as a ‘safe’ crypto-asset,” ESMA wrote in a statement released last October.

In the same statement, ESMA clarifies that MiCA’s provisions on crypto-asset services will only enter into application in December this year. Therefore, ESMA warned investors and clients that they will not fully benefit from MiCA’s EU-level safeguards throughout the implementation phase.

The statement added that, due to the 18-month additional transition period granted to certain jurisdictions, some crypto-asset holders may not see full protection and rights from MiCA until July 2026 at the latest.

Implementation of MiCA

The MiCA regulation focuses on governing stablecoins, or coins that “tether” their values to fiat currencies to maintain the stability of the coins’ values. Upon entering into force, MiCA will apply for issuers of stablecoins and crypto assets, as well as Crypto Asset Service Providers (CASPs) in the EU.

Upon adoption, the regulation will impose uniform EU market rules for crypto-assets, particularly for those that remain unregulated by existing laws. Key provisions instituted by MiCA include standards for transparency, disclosure, authorization and supervision of transactions.

The implementation stage of MiCA is set in three phases through consultation packages. The first and second package of the regulation was launched in July and October of 2023, respectively, while the third is scheduled for the first quarter of this year.

ESMA also engages in public consultations to finalize regulatory standards of these packages by collaborating with other European financial authorities. These firms include the European Banking Authority (EBA), the European Central Bank (ECB), and the European Insurance and Occupational Pensions Authority (EIOPA).

Impact on the crypto market

According to a report released by global identity intelligence firm AU10TX, the third quarter of 2023 saw a 56 percent surge in fraudulent payments in the payments sector. At the same time, the report also noted a 51 percent drop in fraudulent attacks in the crypto industry.

The firm attributes this significant drop to the implementation of the MiCA regulation in Europe,

Per AU10TX, despite the regulation only taking effect in late 2024, various organizations have taken preemptive measures to align their regulations with MiCA, such as those taken by ESMA.

The newly enacted regulations have curbed illicit crypto activities while also diverting cybercriminals’ attention to the less-regulated payments sector, attributing to the surge of fraud in the said sector.

Meanwhile, the European Parliament projects that while MiCA is expected to enhance consumer protection and financial inclusion, the same may not apply to non-EU countries. EU Commissioner Mairead McGuinness warned that this discrepancy between EU and non-EU regulations may trigger volatility for stablecoins.