MiCA's Brussels Effect

Yesterday marked the end of MiCA's transitional period. Any firm providing regulated crypto-asset services in the EU must now be authorised to serve the EU market. This has already led to considerable consolidations, some last minute departures and deep moats from those that moved early.

Regardless of their current position – already authorised, seeking authorisation or sitting on the perimeter – most EU crypto businesses are going to spend part of their summer on the European Commission's (EC) long-awaited MiCA review consultation, which went live on May 20th. The consultation is part of the mandated reports under MiCA's Article 140 and 142 – prompting the EC to assess whether the regulation remains fit for purpose or if new legislative actions are warranted based on market developments.

The Gold Standard

MiCA is the most significant (or talked about) piece of crypto regulation from a major economic jurisdiction. In full application since December, 2024, yesterday marked the end of the transitional period after which all Crypto-Asset Service Providers (CASPs) must be fully authorized. Its critics are many and so are its flaws. Nonetheless, MiCA has become the gold standard which other jurisdictions measure themselves against. The EU may be criticized for a lack of innovation, but when it comes to regulation – good or bad – the Brussels-machine still out-produces the rest of the world. The MiCA review is another chance to prove a regulatory framework can promote innovation, not just constrain it.

Nearly six years after its inception, and just eighteen months after full application, MiCA might already stand as one of the cleanest examples of 'The Brussels Effect'. Coined by Columbia professor, Anu Bradford, the term refers to the European Union's ability to influence global rules due to its legislative resources and market size. Born out of dollarization-fears, there are not many in the crypto policy world that have not heard the MiCA-origin story. A room full of central bankers and a presentation on a new form of money from the world's biggest social media platform and all of a sudden we had a G7 report on the impact of global stablecoins.

And while it did start with a Libra pull request, the honest intention of the regulation was to provide legitimacy to the sector. In fact, the politics of legitimacy cast a long shadow over MiCA's two-year negotiation, which undoubtedly distorted the final text. Not only was the framework at constant risk of turning into a Christmas tree, but the ongoing market highs and lows led some of those involved to forget why the regulation had been proposed in the first case.

Meanwhile, the rest of the world has been catching up – and they continue to look at MiCA. From the UK to Singapore to Hong Kong and the US, they all started with the necessary response to stablecoins. In spite of widely different approaches in (and reasons for) getting there, the US' GENIUS Act at the end of the day does not differ too much from MiCA's stablecoin rules, with some obvious exceptions. Some might credit the FSB or G7 for laying the foundation, but MiCA really designed the architecture. The question is whether CLARITY's building blocks for centralized service provision will remain not too dissimilar to MiCA's – or if the deeper differences in asset classification and supervisory reach will propel it to become an alternate standard for others to copy.

This is not a one-way street. As clearly evidenced elsewhere, coming in late – or too strict – risks the world simply ignoring EU frameworks rather than borrowing from them. Sometimes that's just the way the cookie crumbles, right Claude? Market innovation and demand, paired with political posture, can hold the same opportunity for global influence as regulating first.

Towards dominant design or lagging behind?

This brings us to the ongoing MiCA review. What exactly is the EC's intention this time around beyond meeting the deadlines it was given? Just fixing multi-issuance once and for all? Responding to the very big maybe that is the CLARITY Act? Or US politics on derivatives and crypto perps?

There are 86 questions in the consultation. The EC seems entirely unclear about what they want. Are they moving to set a new standard on previously unanswered questions or simply catch up with current market hype and the jurisdictions that are now benefitting from fast-follower advantages?

Review clauses have been added more and more consistently to EU legislation in an attempt to further evidence-based assessments of the rules put in place. An effective tool not least for sectors evolving at a rapid pace. It is important to highlight that the review clause does not actually commit the EC to propose any substantial changes. In that regard, we are all left guessing as to whether the consultation will lead to a neat "we will continue to monitor" report to the European Parliament, MiCA 1.1 or a completely new OS.

The EC is at an inflection point. CLARITY might be enacted or it might stall – but innovation will not. AI has upended the pace at which software is developed and deployed. With GENIUS passed and CLARITY looming, the US has gained momentum: the CFTC is moving forward with new guidance to bring perps onshore and into the regulatory perimeter in the US and SEC staff have been putting out one useful statement after another, allowing the market to develop further.

Yet, there is no permanence. Where major jurisdictions like Japan and Korea were clearly looking to MiCA just a few years ago, everyone is waiting to see whether CLARITY lands materially lighter – recalibrating who to follow.

The EU's legislative cycles are long and painful – and that is precisely why they should produce something durable. The EC cannot simply be content tinkering at the edges of MiCA with this review. Adding another instrument here or centralized service provider there does nothing in terms of longevity and exportability. If the EU wants to remain relevant it needs to do more than export rules – it needs to foster the innovation those rules govern.

As Mr. Draghi said the EU must be targeted in its policy efforts within digital and advanced technologies if it is to try and catch up. Carving in perps and settling multi-issuance closes gaps; it does not open doors. The harder, higher-value move is defining how regulated institutions can actually plug into DeFi rails and how alternative access points can compete with those we pay to custody our assets. This is worth spending a cycle on.

As the lines between TradFi and DeFi blur, providing a clear framework for the development of new market infrastructure seems more important than what type of investor screening or warning is sufficient for a perp or prediction market. Is the DLT Pilot enough? Can a new MiCA really support the SIU? The framework does not have to be perfect, it does not (and cannot) contemplate everything, but it should aim at more than closing gaps.

The geopolitical climate and obvious focus on vital things such as energy and defence does not exactly leave a lot of room for the Brussels-machine to spare resources on a nice-to-have. But getting this right will mean the difference between importing both products and regulatory design and continuing to write the rules that the world follows – this time, the rules under which Europe also builds.

Jon Fink Isaksen, Founding Partner