With MiCA being given the green-light within the EU, what could this mean for the insurance sector?

In what has been touted as an important milestone for the crypto industry, on 20 April the EU Parliament voted, by overwhelming majority, to pass the Markets in Crypto Act (“MiCA”). When implemented in 2024, MiCA is likely to represent the most comprehensive regulatory framework for crypto assets, harmonising the regulatory position across the EU and laying the foundations for future crypto regulation globally.

What is the purpose of MiCA?

MiCA is frequently described as the equivalent of the EU financial services regime for the crypto-sector. With the sector being largely unregulated at present, consumers are exposed to significant financial risks, as has been widely reported.  Further, providers of crypto related services are required to navigate the often significantly different regulatory regimes of various member states, this being at odds with the fundamental principal of a single European market. MiCA is aimed at harmonising regulation and addressing these issues across the EU. Risk and regulatory uncertainty are stifling the industry and leading to a loss of confidence in the product, and so it  is hoped that regulation will drive confidence in the market.

What is the remit of MiCA?

The majority of unregulated fungible crypto-assets shall fall within the remit of MiCA, including digital currencies and utilities tokens. It shall not apply to NFTs or security tokens, the latter of which would be subject to existing EU financial legislation (as is likely to be the case with other financial instruments that utilise a crypto-wrapper).
MICA shall apply to the issuers of cryptoassets and related services providers. In broad terms, this will cover parties involved with making crypto assets available to the public, those involved with the trading of crypto-assets and related service providers.
What changes will be implemented?
By way of broad overview, MiCA will:

• introduce a unified licencing regime for crypto-businesses (which will include the need for incorporation within the EU);
• require the publication of white papers by the issuers of crypto-assets, these papers being akin to prospectuses required under the financial services regime;
• require disclosure of the energy consumption and environmental impact of crypto businesses – specifically, this will involve asset issuers declaring the blockchain consensus mechanism used in conjunction with their crypto-assets;
• requires the issuers of stablecoins to maintain adequate reserves, with larger providers being subject to supervision by the European Banking Authority;
• create a market abuse regime, addressing market manipulation and insider trading issues that are currently synonymous with the crypto-space (thereby limiting the scope for ‘pump and dump’ schemes etc); and
• empower competent supervisory authorities within member states to oversee and enforce MiCA (with the European Securities and Markets Authority having the power to intervene if where there are larger scale concerns).

How has MiCA been received?

The reception to MiCA within the crypto-sector has been generally positive, with large players such as Coinbase applauding the introduction of “sensible crypto regulation” within one of the largest crypto-markets. The overall consensus appears to be that MiCA has struck the correct balance between regulation (i.e. protecting consumer interest and promoting operational clarity) and not stifling innovation. Accordingly, other jurisdictions are expected to follow suit, with the Ukraine having already confirmed that it intends to adopt MiCA. The manner in which the UK will respond is yet to be seen. However, the Treasury has indicated that the introduction of crypto-specific legislation is under consideration and MiCA is likely to expedite this.

What are the implications for the insurance industry?

The crypto-industry remains a largely untapped market for insurers. Lack of regulation has been a key factor in the caution that many insurers have displayed with regard to offering cover within the sector. As a result, a number of crypto-businesses have been forced to opt for captive insurance or other self-insurance options. However, MiCA represents a potential sea-change that introduces some much needed regulatory oversight and market stability into the sector.

The increase in regulation is also expected to encourage traditional financial providers and other reputable businesses to move into the space (as was the case prior to the ‘crypto winter’). Such businesses are likely to see crypto-insurance as a key part of their risk mitigation strategy and may, in fact, be required to obtain suitable cover as a result of regulatory requirement. Therefore, MiCA could quite possibly be the catalyst that leads to the opening up of the crypto-sector to the insurance industry.   

What are the implications for industry generally?

As with the insurance sector, the lack of regulation has held back the investment in crypto and these changes are likely to spark an increase in institutional investors. We anticipate that our clients in industry and the financial services will see this as a safer product, and this will facilitate the use of crypto in cross-border and for day-to-day business transactions. Of key significance, this will drive accountability of crypto-companies and reduce the opportunity for fraud. Companies fearful of unwittingly becoming involved in money laundering will also be reassured as the rules require  financial companies to screen, record and communicate information on both sender and recipient of crypto transactions.