Chapter 2.2. An analysis of MiCA’s provisions
-38. In Part 1 I explained that crypto-assets and blockchain technologies are opening three distinct yet intertwined avenues of innovation. One, dubbed “Schumpeterian”, promises productivity increasing applications. The second, dubbed “Coasian”, offers new ways of decreasing transaction costs and makes new economic models viable. The third, which I dubbed “Northern”, is the most revolutionary because it creates, out of software code, new institutions enabling anonymous people to cooperate and produce value with little or no need for “government” or “state”.
-39. I started Part 2 with a chapter which articulates three main messages:
1.Regulation has often been shown to have a significant negative impact on innovation, with a recent study quantifying a 2.2% consumption-equivalent loss of welfare for the specific case of French labour regulations.
2.As Europe has slid down in the rankings of the corporate world, its legislators agree that it needs all the technological innovation it can muster. Yet they fail to acknowledge that supporting innovation requires trade-offs, some of which increase risks. Moreover, they send contradictory messages by seemingly committing to protecting incumbents from disruptive innovators.
3.By contrast, the US legislator takes a more coherent approach stating that innovation requires less regulations rather than more, trusting the consumers to make the right choices, accepting that harms, failures, and mistakes are the price to pay for innovation and should be addressed ex-post. Even though the US regulators and courts compensate somewhat for the “hands off” approach of the legislator, in terms of economic development, the past decades have proven the American approach right, and the European approach wrong.
-40. In this chapter I begin detailing MiCA’s provisions and highlight its most salient inconsistencies and contradictions.
2.2.1 MiCA’s objectives
-41. MiCA states four “general and related” objectives. I’ll argue that they are anything but, and this has momentous implications.
-42. The first is one of “legal certainty". It proceeds from the reasoning that “for crypto-asset market to develop within the EU, there is a need for a sound legal framework, clearly defining the regulatory treatment of all crypto-assets that are not covered by existing financial services legislation.” To see whether this line of thinking is justified, consider the following: some crypto-assets, specifically the “security tokens” fall under the remit of MiFID II, therefore they are already covered by existing financial services regulation. It is fair to assume that their development has benefitted to the full extent from the existence of a “sound legal framework” (which other crypto-assets do not yet benefit from). Yet despite that, as P. Hansen observes, “In the 2022 global crypto adoption index, not a single EU country is part of the top 20 countries.”
-43. It also important to note that whatever developments have been seen in crypto-assets markets, both outside Europe and inside, they happened within existing legal frameworks, which MiCA would either supplant, or, as we’ll see, supplement. Yet we’ve quoted numerous scientists observing that regulation can be about as often bad as it can be good. It is fair to ask, what is then supporting the argument that the European legislator has accumulated enough knowledge for MiCA to be that “sound legal framework”, which is good, rather than bad for the economic performance of the EU, when other successful global actors such as the US prefer to wait, and let markets and regulators work within the existing legal framework, especially in the comparatively modern European context of MiFID II?
-44. A theoretical underpinning of the observed US approach can be found for instance in a recent opinion piece recently published in Barron’s by Kevin Werbach, chair of the Department of Legal Studies and Business Ethics at the University of Pennsylvania Wharton School. Professor Werbach writes: “Through mechanisms such as proof of reserves, zero knowledge cryptography, and smart contracts as a regulatory technology, the inherent transparency and immutability of blockchains can be employed to make crypto banks even more safe and compliant than traditional ones. This will require regulators and legislators to adopt principles-based regimes that give firms latitude to identify the best solution to the public policy problem, and risk-based differentiation among digital asset activities rather than treating “crypto” as a single thing.”
-45. The second objective is to “support innovation”, which is expanded thus: “To promote the development of crypto-assets and the wider use of DLT, it is necessary to put in place a safe and proportionate framework to support innovation and fair competition.” This argument seems to contradict the reasoning used by the American lawmakers when they state “America's tradition of invention has been at the heart of our economic strength. As lawmakers, we must recognize that the only way forward is to place our trust in the American people and to get out of the way.” “Putting in place a sound legal framework” appears semantically opposite to “getting out of the way”, but I reckon that the differences need to be judged in the context of “civil law” versus “common law” systems.
-46. However, it’s hard to see how these two arguments can both be true at the same time, which leaves the door open to the charge that one of the legislators, either the European or the American one, engages in what has become known as Orwellian “doublespeak”, i.e. language which cultivates intentional ambiguity or downright inversions of meaning in order to disguise the nature of the truth. Here it is also worth noting that Patrick Hansen’s commentary does not acknowledge “support innovation” when analysing and listing MiCA’s objectives, but instead talks about “affecting technological and economic innovation” . We will explore further down some of the likely meanings of the word “affecting”.
-47. MiCA’s third objective is “instilling appropriate levels of consumer and investor protection and market integrity”. Although the EU legislator fails to acknowledge it, the testimonies before the US Congress which I quoted above make clear that a focus on protecting consumers and investors is not easily compatible with a focus on supporting innovation. Pairing “supporting innovation” with “protecting consumers and investors” is among the main reasons why MiCA’s objectives are not only unrelated, but rather at odds.
-48. The fourth objective of MiCA is to “ensure financial stability” and the legislator admits here that MiCA pre-empts stablecoins actually becoming systemic. In this context it is worth quoting a previous publication by Patrick Hansen, in which he observes: “The current stablecoin market is already heavily dominated by USD-stablecoins (over 99%). This brings not only FX-risks for European consumers (e.g., using DeFi), but, more importantly, leads once again to significant amounts of economic value creation being denominated in USD.”
-49. It should be noted that despite that (or perhaps because of it), the US Congress has not yet moved to regulate specifically the USD-denominated stablecoins and does not seem overly concerned about their impact on financial stability, notwithstanding the 2022 collapse of a significant USD-denominated stablecoin, TerraUSD (on which, more later). Perhaps as a consequence, regulatory enforcement action led later to the orderly wind down of BUSD, another significant stablecoin.
-50. Furthermore, Prof. Werbach comments on a recent, rather counter-intuitive event: “It’s true that the USDC stablecoin, overseen by Circle in partnership with Coinbase, depegged briefly amid Silicon Valley Bank’s collapse. The stablecoin fell to nearly 80 cents on the dollar when Circle announced that $3.3 billion of its reserve assets were frozen at the insolvent bank. Yet that was a case where the failure of a traditional regulated bank threatened to contaminate crypto, not the reverse.”
-51. Patrick Hansen advises: “The current proposed EU rules for crypto (MiCA) will effectively suppress Euro-denominated stablecoins even before the emergence of this market. […] If the EU wants the Euro to play a major role in the future of global payments, stifling Euro-backed stablecoins is literally the opposite of what should be done.” Here again it should be stressed that the unmentionable goal of a near-complete suppression of euro-denominated stablecoins collides frontally with the objective of “supporting innovation”.
-52. It is also questionable whether erecting insurmountable barriers in front of stablecoin issuers effectively serves to ensure financial stability. In a recent article on the worrying transformation of traditional finance in the US, The Economist was writing: “To limit moral hazard, other tools such as deposit-rate caps constrained banks. This has remained the general ‘lender of last resort’ template ever since: authorities both provide support and impose limits. Getting the balance right is what is fiendishly difficult. […] Rather than making the financial system safer, policies such as the deposit-rate caps had pushed activity to shadow lenders.” It can similarly be feared that the policies MiCA enacts around ARTs and EMTs can push activity to issuers outside the EU and weaken the role of the euro and thus, indirectly, financial stability.
-53. Overall, MiCA reckons that “it is crucial for Europe to reap all the benefits of the digital age and to strengthen its industrial and innovation capacity” and “aims at positioning Europe at the forefront of blockchain innovation and uptake.” Yet it stretches credulity to believe that its objectives are compatible, consistent, and attainable.
-54. A sound set of quantitative indicators and monitoring mechanisms to enable following up the actual outcomes of the regulation should help build confidence in the regulation. MiCA is thus accompanied by an “Impact assessment” document which offers a non-exhaustive list of indicators to be monitored. It is outside the scope of this document to analyse them in detail, suffice to say that at this time, its most conspicuous omission is that of external benchmarks.
-55. To sum up, MiCA enounces four objectives which it claims to be “general and related”. Given the nature of blockchain technologies and crypto-assets, the very pertinence of the first, “legal certainty”, can be called into question, the second (“supporting innovation”) and the third (“protecting consumers and investors”) are at odds, while an analogy with financial regulations leads me to fear that the way the regulation chooses to pursue the fourth (“financial stability”) might well achieve the opposite of what is intended.
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[119] K. Werbach, “Finance Runs on Trust. Crypto Should Get to Earn It, Too”, Barron’s, 2023,
[120] Wikipedia, https://en.wikipedia.org/wiki/Doublespeak
[121] P. Hansen, “The EU’s new MiCA framework for crypto-assets – the one regulation to rule them all”, op. cit.
[122] K. Werbach, op. cit.
[123] P. Hansen, “Europe’s Third Way is Web3: Why the EU Should Embrace Crypto”, op. cit.
[124] The Economist, “The Fed smothers capitalism in an attempt to save it”, March 2023,