Certain titles of MiCA, the European Union’s crypto regulation, will come into force from 30 June and on the last day of the year, the entire regulation will come into force. It is a groundbreaking package and will be the most comprehensive regulation of the global crypto-asset market to date.
The recent focus on this young asset class is not solely due to the incoming regulation but is also driven by the resurgence in crypto prices, which have risen sharply this year. Since 2017, the market capitalization of crypto-assets has risen from $18 billion to over $2 trillion. In the long term, however, it is not charts but regulation that could signal the real breakthrough.
Today, crypto-assets are attracting more and more investors, especially after the approval of 11 Bitcoin ETFs in the US in January 2024, which have since seen significant capital inflows.
Traditional Finance may have an advantage this time
Cryptocurrencies and blockchain technology have once again become major topics in the financial sector. In 2017, blockchain received significant attention, with leading financial institutions announcing a series of promising projects to leverage the technology.
Their success was not primarily hindered by the bursting of the ICO bubble and falling crypto prices, but by the lack of regulation. Financial institutions are strictly regulated, and the crypto market, which at the time resembled the Wild West, deterred even the most enthusiastic supporters. We expect this to change in the coming years, as MiCA will create favorable conditions for traditional financial institutions.
The EU is keen on wining this race for innovation
The US and China are leading the way in harnessing the main breakthrough technologies of the last decade (e.g., artificial intelligence, IoT, electric cars). The EU, which lags on several fronts, is often criticized for its lower competitiveness in new technologies due to bureaucracy and over-regulation.
MiCA has the potential to reverse this trend, with the EU determined to exploit the potential of blockchain technology and digital assets more effectively than its economic rivals. The new regulation will bring a single European license to the market for crypto-asset service providers, with requirements that can both protect consumers and foster innovation.
Moreover, the conditions for this endeavor are promising. There are around 31 million digital asset users in the EU, and 63 of the 134 crypto-friendly banks globally are headquartered in the old continent.
How does MiCA create clearer conditions?
MiCA, adopted last spring by the EU’s main institutions, divides the regulated actors into two main groups: issuers and service providers. Within the former, it distinguishes three types of actors according to the nature of the tokens issued.
Every provider looking to offer any of the 10 crypto-asset services defined by MiCA has to comply with certain uniform requirements. Additionally, specific requirements related to each individual service must be met by the providers who wish to offer the respective service to their clients.
Crypto-asset services include, among others, crypto custody, execution of orders for crypto-assets, operation of crypto trading platforms, or the provision of advisory services on crypto-assets.
Banks introducing crypto-related services can increase and diversify their revenues and position themselves as innovative players in the market that are seen as agile and responsive to new trends. Among these services, the provision of crypto trading and custody is an ideal entry point, and it is no coincidence that most banks plan to launch these services first.
The CEE region already has a first mover
In early 2024, Raiffeisen Bank’s Austrian subsidiary launched crypto trading for its retail customers. The bank integrated the services of a neobroker, Bitpanda, into its retail banking application. At the time of writing, after registering with Bitpanda, customers can trade hundreds of crypto-assets, though currently only via the mobile app.
Further entrants are expected in Europe. Deutsche Bank, Crédit Agricole, Banco Santander and Societe Generale have already acquired crypto custody licenses, and the latter may soon also offer crypto trading to its customers.
Moreover, there is considerable interest from asset managers, with 75% in Europe planning to increase their Bitcoin exposure soon, according to a survey.
The demand from investors continues to increase
Crypto-assets have been attracting the attention of retail investors for years, and this trend is evident in Europe. A 2022 survey looking at the percentage of the population investing in the asset class for each EU country confirmed that an average of 10,3% in the EU27 countries own or have previously owned crypto assets. Slovenia came first with 18%.
Figure: The percentage share of EU countries’ population who own or have owned crypto-assets. Data: Flash Eurobarometer, Number 509, 2022.
The significance of these results is heightened by the fact that prices have risen considerably since and regulation is coming as well. Today, most investors must rely on crypto exchanges or neobanks (e.g., Revolut) offering crypto trading to buy crypto-assets. The expected entry of financial institutions is likely to generate additional interest.
There are different options for Banks to provide crypto
In our view, Banks planning to introduce crypto trading can approach the implementation along three main lines:
- Providing Direct Exposure: Offering various crypto derivatives without allowing clients to hold actual crypto-assets;
- Partnering with Crypto Specialists: Enabling direct investments in crypto through partnerships with specialized crypto-asset service providers;
- Directly Introducing Crypto Trading: Cooperating with partners such as crypto exchanges, custodians to offer direct crypto trading for clients.
Each market participant can therefore choose between different strategies according to their own strategic objectives and the needs of their customer base, thus maximizing the business value realized through the launch.
At Dorsum, we regularly support our clients in making business decisions around such topics. If you have questions about blockchain technology and digital assets, or are planning to implement such a service, please do not hesitate to contact us.
Authors: Péter Kanti, Botond Bátorfi
