The EU (European Union) is preparing the text for cryptocurrency regulation. A reported leaked draft of the text shows rules that could apply to algorithmic stablecoins and fractionalized NFTs. This is in the form of the Markets in Crypto Assets (MiCA) legislation, which is being finalized.

The concern here is how it will affect the cryptocurrency market once it is put into effect. The leak dated from Sept. 20 appears to indicate to lawmakers  to regulate digital assets like stablecoins and NFTs in particular.

The following will be required from issuers of cryptocurrency once MiCA is passed:

- Published white paper detailing a technical roadmap

- Registration with authorities

- Capital requirements for stablecoin issuers

- Management of financial assets

Of interest among the regulators appears to be algorithmic stablecoins, following the Terra UST meltdown and volatility in the cryptocurrency market. The requirement will be for these coins to fall under a regulatory framework. This is most likely to protect consumers and prevent incidents where de-pegging of an asset can lead to the collapse in value.

NFTs are also hot under the radar of regulators. Due to popularity and the potential for financial fraud (e.g. rug pulls, scams), NFTs are attracting plenty of attention. A new type of NFT, using fractionalized assets, is being looked into. Even though NFTs are singular and unique, there are still ways to split up the cost of investing in NFTs. If that is the case, then regulators could classify the NFTs as securities that must be registered.

How MiCA will cover DEX (Decentralized Exchanges), DAO (Decentralized Autonomous Organization) and tokens that are truly decentralized will be interesting. They don't have a board of directors or actual organization that regulators can come after. A DEX for example, is just code that executes on the network. It is not owned by anyone and it has no central authority that can be regulated. Does this mean that regulators will also come after computer code? Crypto is open source and does not require permission to install and use.

Will there also be clarity regarding protocols in DeFi? Does staking require special laws or can anyone do it? With crypto there are no restrictions or barriers to entry for anyone who wants to stake, so long as they have the tokens. While crypto can be more inclusionary, the TradFi (Traditional Finance) sector is highly regulated and cannot just allow anyone to become an accredited investor or fund manager. In crypto, anyone can basically become their own fund manager and handle liquidity without answering to any central authority. That is giving a lot of power back to users, which can trouble regulators who want to be able to track down anyone in financial services.

The overall implication here is when it becomes law it will affect the rest of the world and how they deal with crypto assets. Once MiCA is public, more clarity on regulations will be known.  Although regulations are contradictory to cryptocurrency ideology of decentralization, it may be necessary to further adoption. What the regulators want is not just control, but also accountability, which is fair enough. The control part seems unlikely, so that is the slippery slope that still needs to be addressed. The policies are hopefully not too restrictive, but fall within tolerable guidelines that will not kill demand in the market.

Disclaimer: This is not financial advice and is for educational or reference purposes only. Please DYOR to verify information.