31 May 2023

Study for ECON: Remaining regulatory challenges in digital finance and crypto-assets after MiCA

It analyses the need to adopt further EU financial regulation on decentralized finance after the implementation of the MiCA Regulation and revision of Transfer of Funds Regulation, especially on crypto lending, staking, custody, the use of non-formal information, NFTs and sustainability.

EXECUTIVE SUMMARY
Background
With its decisions of 20 April 2023, the European Parliament (EP) adopted the new Markets in Crypto-assets Regulation (MiCA)1 and the revised Transfer of Funds Regulation (TFR)2. This study has been commissioned to support the work of the European Parliament’s ECON Committee by identifying the potential challenges remaining after MiCA’s adoption and the TFR’s revision, and by discussing whether further legislation is necessary on decentralized digital finance and crypto-assets in light of the lessons learned from the Crypto Winter of 2022-2023.
The study is also relevant in view of the scheduled review of MiCA (18 months after its entry into force), in particular on areas which were not addressed in the Regulation, as well as in the broader context of ongoing legislative reviews of EU financial services legislation (i.e. MiFiD review, proposed Listing Act, review of Market Abuse Regulation etc.).
Aim
This study identifies policy options and discusses their upsides and downsides with regard to Decentralized Finance (DeFi), non-fungible tokens (NFTs) for financial use, crypto staking/lending, the use of non-formal communication means and sustainability related matters. In particular, it provides:
• a brief summary of relevant EU and global market developments and trends, and an analysis of the regulatory and supervisory challenges that justify regulatory intervention considering the state of knowledge in other jurisdictions and by international standard setters such as the Financial Stability Board (FSB), International Organization of Securities Commissions (IOSCO), International Monetary Fund (IMF) and Bank for International Settlements (BIS);
• an overview of risk mitigating tools at EU level to address the major risks in the status quo prior to MiCA’s entry into application;
• a robustness check of the EU’s upcoming MiCA framework and, assuming its adoption, the identification of remaining risks; and
• a list of policy proposals through which the remaining risks and deficiencies identified may be addressed at EU level.

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