Markets in Crypto Assets (MiCA) and Trade Surveillance Regulatory Requirements

MiCA Regulation Will Be Fully In-force by December 2024 – By Jonathan Dixon, Director of Regulatory Affairs, EMEA

The world of cryptocurrencies and digital assets has been rapidly expanding, presenting both opportunities and challenges for regulators. As governments strive to protect investors, combat financial crime, and foster innovation, the European Union (EU) has taken a significant step forward with the Markets in Crypto Assets Regulation (MiCA). It places a strong emphasis on preventing Market Abuse and promoting the detection of manipulative practices as requirements for Virtual Asset Service Providers (VASPs) or, as termed in MiCA, Crypto-Asset Service Providers (CASPs). MiCA introduces rules to detect and prevent such activities including monitoring trading patterns, order book manipulation, wash trading and insider dealing. Trade surveillance software , as what Eventus provides, can identify instances of suspected market abuse, enhancing market integrity and investor protection under MiCA.

Regulating the Crypto Landscape

MiCA sets out comprehensive rules for issuers, service providers, and digital asset trading platforms operating within the EU having passed EU Parliamentary approval on 20th April 2023. It introduces requirements for capital, custody, investor protection, and governance, aiming to bring more transparency and stability to the crypto market. By establishing clear guidelines, MiCA seeks to provide legal certainty, enhance market integrity, and protect consumers.

The timeframe for implementation has commenced following the publication in the Official Journal of the European Union and formally enters into force on the 20th day following its publication. By 30th June 2024 both the European Securities Markets Authority (ESMA) and the European Banking Authority (EBA) are to develop draft Delegated Acts on both Regulatory Technical Standards (RTS) and Implementing Technical Standards (ITS), and Titles III and IV, covering asset-referenced and e-money tokens, will start to apply. By 30th December 2024 the remaining parts of the rules will start to apply across EU member states.

MiCA Aims and Objectives::

1. Investor Protection: One of the primary objectives of MiCA is to safeguard investors and consumers participating in the crypto industry. By enforcing stringent standards for service providers and requiring authorisation, MiCA aims to weed out fraudulent actors and enhance the credibility of the sector. Improved investor protection measures foster trust, potentially attracting a broader range of participants to the market.
2. Regulatory Clarity: The crypto industry has long struggled with regulatory uncertainty, creating barriers to entry and hindering mainstream adoption. MiCA addresses this issue by establishing a harmonised framework across EU member states, providing clarity and consistency for businesses and investors. The regulatory certainty offered by MiCA can unlock the industry’s full potential and encourage innovation and growth within Europe.
3. Fostering Innovation: Contrary to popular belief, regulation and innovation are not mutually exclusive. MiCA seeks to introduce regulations while still allowing room for innovation and technological advancements in the crypto space. The regulation aims to nurture an environment where legitimate projects can thrive, promoting the development of novel use cases, decentralised finance (DeFi) platforms, and other applications of blockchain technology.

Challenges to Address:

1. Proportional Approach: It is essential that regulations are proportional to the risks associated with different types of digital assets and activities. A “one-size-fits-all” approach may stifle innovation and disproportionately burden smaller businesses and startups. EU regulators say they are considering the diversity of the crypto ecosystem and will tailor MiCA’s regulations accordingly to promote a balanced playing field.
2. Global Competitiveness: European officials see MiCA as a way to boost the EU’s competitiveness. Strict crypto regulations may drive businesses to seek more favorable jurisdictions, potentially hampering Europe’s position as a hub for innovation. Collaboration and coordination with international counterparts can help  maintain a level playing field while fostering crypto innovation within the EU.
3. Technological Adaptability: The rapidly evolving nature of the crypto industry calls for digital asset regulatory frameworks that can adapt to emerging technologies and business models. Collaborative engagement amongst regulators, industry stakeholders, and technical experts can help strike the right balance of enforcement and flexibility and ensure crypto regulations remain effective in an ever-changing digital asset landscape.

Validus in Practice

MiCA represents a significant milestone in the regulation of crypto assets within the European Union. By providing legal clarity, investor protection, and fostering innovation, MiCA sets the stage for a more mature and sustainable crypto industry. Like with MiFID II, Validus helps meet the stated regulatory requirement of effective digital asset surveillance by allowing for the monitoring of manipulative behaviours via a suite of procedures that cover, but are not limited to, the following:

• Trade that exhibit signs of spoofing, layering, front running and other patterns of market manipulation
• Trades or orders that exceed a percent of Average Daily Volume (ADV)
• Trades outside of the market best bid or offer at the time of execution
• Trades or orders that exceed a quantity or notional amount
• Orders that execute through multiple levels of the order book over a short period of time
• Sequential fills in a short period of time with substantially different prices 
• A series or orders and fills which move the market a significant amount
• Identifying price moves based on market data whether or not initiated by internal trading
• Placing orders during the pre-open period that impact published price indications
• Identifying orders placed near the close that appear to have influenced the closing price

Validus enables clients to get to their risk quicker through a combination of in-depth visualisation interfaces, robotic process automation (RPA) and customisable procedures that meet the requirements of firms’ risk assessments.

About Eventus

Eventus is a leading global provider of multi-asset class trade surveillance, market risk and algo monitoring solutions. Its powerful, award-winning Validus platform is easy to deploy, customize and operate across equities, options, futures, foreign exchange (FX), fixed income and digital asset markets.

Validus is proven in the most complex, high-volume and real-time environments of tier-1 banks, broker-dealers, futures commission merchants (FCMs), proprietary trading groups, market centers, buy-side institutions, energy and commodity trading firms, and regulators. The company’s rapidly growing client base relies on Validus and Eventus’ responsive support and product development teams to overcome its most pressing regulatory challenges. For more, visit  www.eventus.com.