EU countries have become the first key jurisdiction to adopt a comprehensive cryptocurrency approach, namely the Cryptocurrency Asset Sales Market (MiCA) regulation. The regulation aims to provide predictability of laws and regulations for cryptocurrency markets and investors through the development of standardized regulations and unified standards in the EU

MiCA is likely to ultimately eliminate innovation, implement comprehensive regulation of decentralized finance (DeFi), and increase the compliance costs of decentralized exchanges (DEX)The DeFi service platform has caused privacy breaches and requires communication between cryptocurrency markets and regulatory organizations to achieve a balance between regulation and innovation.

Blocking innovation

According to the one size fits all regulatory approach for DeFi, MiCA is likely to interfere with innovation as it may not have taken into account the unique characteristics of blockchain technology system software. Therefore, DEX and DeFi service platforms may incur higher compliance costs, which will reduce innovation and provide new products and services.

The Dodd Frank Act in the United States and many similar policies and regulations in the traditional financial industry have been criticized for their negative impact on innovation. For example, due to increasing regulatory requirements and compliance costs, small and medium-sized banks or financial enterprises find it difficult to compete with large and medium-sized banks. As a result, the number of community banks has decreased, and commercial banks have become increasingly centralized.

Similarly, MiCA restrictions may prevent smaller DeFi companies from entering the market, thereby hindering industrial integration. DeFi is committed to providing a blockchain technology, open to the outside world, and unlicensed financial system, and its basic principles may also be violated due to MiCA's legal enforcement of decentralized networks.

Increased compliance costs on DEX and DeFi platforms

As mentioned above, the implementation of MiCA is expected to increase compliance costs on the DEX and DeFi platforms promoted in the cryptocurrency market. MiCA policies and regulations will implement a series of systems and regulations for DEX and DeFi service platforms to ensure the protection of consumer rights, avoid money laundering and maintain the integrity of the sales market. Like the traditional financial market department, in the past, the regulatory compliance regulations could be both expensive and time-consuming.

Traditional financial institutions traditionally bear significant costs in complying with regulatory requirements, especially in the years following the 2008 financial crisis. Financial institutions, car insurance companies, and other financial industry institutions must now pay more to comply with a new regulatory framework, such as Basel III and the Dodd Frank Act. Compliance costs include personnel allocation, technical costs, and implicit expensive legal and regulatory costs.

Similarly, it is estimated that MiCA regulation will increase operating costs, which may limit new players from entering the market. The harm of this cost to innovation and market competition in the cryptocurrency sales market remains to be observed. However, the demand for compliance may become a challenge for newly registered companies and limit the level of competition between small and medium-sized enterprises and higher, more mature participants in the market, who can better absorb and absorb this cost.

Privacy leakage

Due to MiCA regulations, encrypted asset service providers collect and store a lot of personal information, including customer ID information, transaction history, and other confidential data. Privacy breaches will also be explicitly raised. This type of data collection may lead to infringement of personal privacy and increase the sensitivity of encrypted assets to hacks.

Traditional financial law, such as the Bank Secrecy Act (BSA) of the United States and the General Data Protection Regulations (GDPR) of EU countries, are also subject to similar privacy leaks. GDPR's strict personal information protection regulations have brought unprecedented pressure to companies, driving up compliance costs, depriving them of innovation, and also receiving criticism. The BSA has also been criticized for requiring financial companies to comply with cumbersome and complex reporting regulations, which are likely to be both expensive and time-consuming, and may pose a risk of personal privacy breaches due to the collection and storage of customer personal information.

In the case of MiCA, extensive data collection and storage regulations may expose customers to personal privacy violations and potential hazards of personal information. Because complying with laws and regulations incurs additional costs, small businesses may also find it interesting to compete in the market with high-level large enterprises. In addition, it may hinder innovation in the cryptocurrency industry.

With laws and regulations like MiCA, the government needs to balance the importance of personal privacy protection with innovation in data encryption business.

Guneet Kaur Enterprise joined Cointelegraph as an editor in 2021. She holds a Master of Science in financial technology from the University of Stirling and an MBA from India’s Guru Nanak Dev University.

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