Crypto Legislation on the Horizon

Europe’s Landmark Crypto Legislation

The European Union has been working on a comprehensive digital asset legislation for several years. After initial agreement on the text of the legislation in June 2022, the full 380-page legal framework called MiCA (Markets in Crypto Assets) has now been finalized by EU policymakers.

MiCA is a landmark legislation, as it is the first attempt by a regulatory body of the EU’s size and scale to build a legal framework for the crypto industry and digital assets. MiCA will focus on the licensing of exchanges and wallets, as well as defining requirements for issuers of stablecoins.

Key highlights of MiCA include:

  • Crypto Asset Service Providers (CASPs) will be responsible and liable for consumer protection.
  • Definitions and regulations for 3 types of crypto currencies: Asset Referenced Tokens (ART), E-Money Tokens (EMT), and Utility Tokens.
    • ARTs are tokens that derive their value from a basket of assets, such as DAI.
    • EMTs are centralized stablecoins such as USDC.
    • Utility tokens are everything that is not an ART or EMT, such as MANA, BAT, LINK, etc.
  • NFTs and DeFi are currently excluded from scope, with legislation planned in the future.

On October 10th, MiCA was approved in a landslide vote by the European Parliament. The official regulation will now be rolled out in early 2023 and come into effect 12 months later.

At Mudra Capital, we believe that MiCA is an incredibly positive development for the crypto industry, as it will pave the way for institutional adoption of digital assets in the EU.

Market Highlights

The month of September continued to see a tug of war between crypto holders and macroeconomic conditions. Despite the uncertain macro environment, which continues to weigh heavily on risk assets including crypto, Bitcoin has continued to trade in a tight range between US$22K and US$19K for majority of the month.

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Ethereum’s successful transition to proof-of-stake on September 15th marked a monumental accomplishment for the ecosystem. Despite a successful “merge,” the price action for ETH in September has been a function of the “buy the rumour, sell the news” phenomenon, dropping sharply mid-September and then stabilizing since then.

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We believe this price drop in Ethereum will be a short-term trend, as the community now turns its attention towards building more complex financial products and applications on the network, creating a demand for ETH. Coupled with the locking of ETH supply in staking with validators and the post-merge reduction of emission per block, this will put upward buy pressure on ETH.

Since public blockchain development is open source, developer “code commits” to repositories that are tagged to ecosystems is a good proxy for the level of developer activity. We can see from the activity data below (# of repos, code commits, and active developers) that Ethereum continues to be the preferred development platform for Crypto/Web3 projects by a substantial margin.

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September also saw several big moves and announcements from institutions and industry players: Visa-FTX partnership, SWIFT-Chainlink proof-of-concept, Charles Schwab/Fidelity/Citadel launching a new digital asset exchange, Robinhood launching a Web3 wallet, Meta adding digital asset functionality, Amazon working on a digital Euro prototype for European Central Bank, and many more. This is a clear signal that market headwinds aside, real world use cases and adoption of digital assets continue to make steady progress.

In September, the White House also released a comprehensive framework for digital assets expanding upon the President’s Executive Order earlier this year. With nine reports submitted by various agencies, consultation and progress continues towards building a regulatory framework in the US for cryptocurrencies and digital assets.

Historically speaking, September tends to be one of the worst months for markets, and October one of the best. Whether a bull run will happen for the crypto markets this October remains to be seen. The long-term narrative for digital assets is getting stronger, but short-term we continue to be in a challenging climate for crypto assets, impacted by the US dollar at its peak, high inflation, interest rates hikes and heavy volatility in forex markets.

At Mudra Capital, we believe that the recent stability observed in Bitcoin’s price, combined with the expanding footprint of institutional players in blockchain and crypto, is a very encouraging sign and could potentially be the early signal of a turnaround for the digital asset market.

What We Are Reading

Web3: At A Tipping Point (Essay by Neeraj Mathur)

Contagion (Market Analysis by Arthur Hayes)

India’s CBDC Concept (The Digital Rupee)

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