Last month a proposal for a regulation on markets in crypto-assets (MiCA) was leaked to the press. It concerns a 168-page document consisting of 114 articles. The proposal has four main self-proclaimed objectives. First, to provide legal certainty and regulatory clarity for all crypto-assets that have not yet been covered by existing financial services legislation. Second, to support innovation and fair competition by providing a safe and proportionate framework to operate in. Third, to provide consumer and investor protection. Finally, to ensure financial stability and orderly monetary policy.
Generally, the proposal is meant as a step towards enabling and supporting the potential of digital finance and thereby positioning Europe at the forefront of blockchain innovation and uptake.
To achieve the aforementioned objectives for crypto-assets, it follows that there is a need to define what exactly may be defined as a crypto-asset. Such a definition has also been included in the draft MiCA Regulation as: “a digital representation of value or rights, which may be transferred and stored electronically, using distributed ledger or similar technology.” This definition is wide, so as to cover all crypto-assets that are not already covered by other EU regimes.
Furthermore, a division into three subcategories is defined. These are utility tokens, asset-referenced tokens and e-money tokens. The first are defined as tokens intended to provide digital access to an application, services or resources available on a distributed ledger, which are accepted only by the issuer of that token to grant such access. The second is defined as intended to be used as a means of exchange, retaining stable value by referring to the value of (a combination of) fiat currencies, commodities or crypto-assets. E-money tokens are defined as a subcategory of asset-referenced tokens, differing in that they are backed by the value of fiat currency only.
Crypto-asset services are defined as well, including a wide range of services and transactions all relating to crypto-assets.
The draft MiCA Regulation is detailed, comprehensive and broad. It may prove a positive step towards providing a framework within which the industry may move on to the next stage of development for applications built on DLT and blockchain technologies. Hopefully, this will promote higher transaction volumes and wider geographical adoption. That being said, some concerns arise from the current version. The current system of compliance and legal requirements described may be too costly and complex for such a young and innovative industry to comply with. To avoid innovation moving away from the EU – exactly contrary to the purpose – reviews may need to establish supportive improvements.
Additionally, the regulation in its current form does not yet apply to financial instruments, which excludes many current and future decentralised finance (DeFi) instruments. This may mean that these markets would no longer be accessible to Europe and her citizens, which may again stifle innovation. A future review may address tokenisation of tradable shares, profit right and interest swaps, as decentralising such financing may boost innovation and open up the financial market for small and medium-sized companies. As Jetse Sprey has pointed out on numerous occasions: “MiCa could provide a EU wide framework for the offering of crypto financial instruments currently not yet uniformly regulated under the EU Prospectus Regulation. Those concern investments of less than EUR 8 million. For such smaller investments the issuing (SME) parties now have to comply with the local laws of each member state. A uniform EU framework, provided by MiCa, could boost cross border investment tremendously. It would put the EU solidly on the forefront of DeFi instruments.”
In summation, MiCa represents a positive change and expresses core objectives and a harmonised approach which will be widely welcomed, though the draft proposal could benefit from a more supportive and inclusive review.