MiCA and Metaworks

October 25, 2022

Welcome to this month’s Crypto: Decrypted! While all eyes are on the Fed and the macro climate, there have been many happenings in the world of blockchain technology that might not have made your radar. Rather than opine on the Fed’s position again (there’s plenty of that already) I want to take this opportunity to explore a few seminal events in the world of crypto that stand to shape our world for years to come.

Let’s begin by noting that we seem to be at the bottom of a four-year cycle in the crypto world and, while it’s certainly possible that we could have another down leg, we see capital that has been on the sidelines starting to deploy at these lows specifically to take advantage of this sector’s anticipated growth over the coming years. There are a lot of bullish events that support this thought process, so let’s get into it.

Shiny MiCA

Mica is best known as silicate rock that often glistens in the light. There is another MiCA that has taken form, however, and this is the European Union’s Markets in Crypto Assets (MiCA) crypto law. Language for this regulatory event had basically been formulated over the summer and was agreed upon overwhelmingly this month by a vote of 28-1. Note that this is not a law yet, but agreement on language after almost two years of debate which all but guarantees the passage of this legislation. The law is expected to go into effect in 2024 and provides regulatory clarity and guidance regarding consumer protection, money laundering and–perhaps most notably–stablecoins (crypto assets that are pegged to another form of currency.) Stablecoins Tether and USDC, both pegged to the US dollar, are the most prolific. However, Circle just launched Euro Coin (EUROC), which is backed 1:1 by the euro. This is important, as one of the takeaways of this bill is that stablecoins not backed by the euro will be limited to 1 million transactions and $200 million euros in transaction value when marketed in the eurozone. This would limit the use of US dollar-backed stablecoins and promote euro-backed stablecoins. The US should take note for a couple of reasons, notably that this points to a world that may be less and less dollar-based in the future. In addition, Europe was first to the table in this regulation, leaving US lawmakers still sorting out their views while, simultaneously, they have been called out by EU Commissioner Mariad McGinness as needing to step up while asking for crypto regulation to be addressed on a global front.

It seems like action only happens after terrible events, and one of the drivers for the acceleration of this bill was the collapse of Terra, the algorithmic stablecoin of the ill-fated Luna blockchain. EU officials state such a collapse would not be possible given this new regulatory framework, which requires crypto issuers looking to do business in Europe to issue a white paper, register with authorities and, in the case of stablecoins, have fully collateralized reserves.

The most important takeaway, however, in my opinion, is that it creates regulatory clarity which is sorely needed. It sets the stage for institutions to deploy capital into the crypto/blockchain space, a sentiment echoed by CFTC chair Rostin Behnam, who postulated that he could see bitcoin doubling with appropriate regulation. That’s quite a sentiment from someone who is crypto-adjacent at best. We think the markets will do much more than that, especially as these frameworks are being created right now, before the next crypto bull run.

Retail Tales

While that’s all well and good on the institutional side, we’ve seen a lot of events happening that will directly impact retail users. Let’s start by looking at Mastercard, who created the “Crypto Source Program” with Paxos. This program is designed to help banks follow crypto compliance rules, verify transactions and provide anti money laundering and identity monitoring services. The goal of this is to make it a little less scary for the everyday retail user to participate in the world of crypto. From our view, this is not only a good thing–it is a necessary thing if banks want to stay relevant (which, of course, they do). This is another step into crypto moving mainstream.

Likewise, the ability to transact easily with crypto using web applications took another big step. First, as some background, I don’t think we could have quite realized how dependent we would become on online transactions back in the ’90s when Mr. Bezos proposed buying books on the world wide web. Amazon paved the way and changed the world as we know it, and online transactions are commonplace today in virtually all industries. What may not be quite as well understood is that many of these transactions are supported by a technology called Plaid, which facilitates safe and secure connections between applications and financial institutions without compromising passwords. If you’ve ever had an accounting application import your financial data or even paid a bill out of your bank account, you’ve probably used Plaid, maybe without even knowing it. Now, I’m pretty conservative when conducting online transactions. I always look at any application touching my bank account very, very carefully, particularly the bridge they use, and even I have grown to trust Plaid-backed connectivity. Without it, we wouldn’t have near the ease of financial transactions on the web today.

Back to the point–this entire preamble has been designed to set the stage for what’s next: crypto wallet integration. Our aforementioned financial industry giant, Plaid, just announced a groundbreaking set of technologies called “Wallet Connect” that will allow the same kind of convenience for accessing crypto wallets, meaning that it will seamlessly create a bridge to allow crypto wallet-based payments on the web. Wallet connectivity is a key component of transacting online, however today it’s currently the responsibility of the application developers. This often creates inconsistency and in some cases opportunities for funds to be hacked. Plaid’s crypto wallet integration will address this by allowing developers of the next generation of web applications (Web3) to seamlessly create websites and applications that can safely and securely access crypto funds from users. I see Wallet Connect as critical for the movement of this industry as, once mature, it will facilitate trust and minimize opportunities for fraudulent activity and hacks.

Metaverse, Metaworks

Meanwhile, while social media giant Meta (formerly Facebook) struggles to get their virtual reality environment to the next level (c’mon, Mark, you even renamed your company to Meta–get your act together), others are boldly advancing what is possible in this new realm. Taking a step back, there is lots of speculation on the metaverse. In general, it is often imagined as a virtual world where you can meet friends, play games, interact in sports activities and, well, do just about anything that can be done in the physical world. Often relegated to play and gaming, it could be much more. The United Arab Emirates certainly believes so, and has set up an entire council focused on making Dubai the “Metaverse Capital of the World”. Marwan Alzarouni, CEO at Dubai Blockchain Center, was recently quoted as saying, “whoever controls the metaverse will control the world,” so the stakes are incredibly high from their perspective.

Dubai, already a progressive blend of East and West, has been at the forefront of innovation for decades and is now taking the same spirit into virtual worlds. Already you can tour the world’s tallest building, the Burj Khalifa, in virtual reality. Not to be outdone, UAE-based Medcare recently launched its first hospital in the metaverse, which allows those considering medical procedures in Dubai to “tour” the facility prior to actually having any procedures done. However, the ultimate goal is to deliver “real-time consultations” and expand the level of healthcare available by providing immersive interactions with doctors. Lest you think it’s just Dubai, Japan is following a similar trend. Both countries are sinking billions of dollars into their prospective initiatives.

This is just the beginning. Consider this nascent version of the metaverse as a “bigger than a brick” portable phone from the ’80s. That technology was considered groundbreaking as you could make a phone call from anywhere and eschew finding a phone booth (which many of you reading this may never have seen) but is a far cry from what our smartphones provide today. Today’s metaverse is like that brick phone, and just as that ’80s luggable evolved into the svelte always-present smartphone that we can’t live without, I expect big things in this sector in the coming years and decades.

In Closing

From the imagination-bending metaverse to the practicality of doing everyday crypto transactions, progress is being made left and right, which is why we are more long-term bullish on this sector than ever. This doesn’t mean that each blockchain project will succeed, however we see that those that are really creating technological foundations will have significant upside in front of them over the years, as innovative technologies tend to do. Of course, we have a long way to go and, of course, we’ll be here to provide insights and understanding along the way.

That’s all for now. Until next time, be well, stay safe, and I’ll keep Decrypting: Crypto for you!

About the author James Diorio

James is a Principal and Chief Executive Officer of Tradecraft Capital.