The European Parliament’s Monetary Committee will soon vote on a directive, Markets in Crypto Assets (MiCA), that will regulate crypto assets in Europe. After a last-minute delay in the vote last week to revisit some provisions, a new vote has been scheduled for Monday (March 14th).
The 168-page document is a comprehensive and detailed report that will provide some security to crypto issuers, exchanges and custodians to operate within a legal framework. Yet, an analysis of the text suggests that some questions will arise from day one, and some products will find it difficult to accommodate the law.
The European Commission proposed this directive in 2020 as a response, at least partially, to the growth of stablecoins and the potential risk to financial stability. As this new product was unregulated, regulators feared that they could circumvent Anti-Money Laundering (AML) rules, so EU lawmakers designed a new law that would complement what existed. It’s one of the reasons the document heavily regulates stablecoins, referred to as “asset-referenced token” or “e-money token,” while leaving out other crypto assets, which are subject to lighter requirements.
For crypto exchanges, crypto issuers and other companies trading crypto assets, the requirements include registering as legal entities in Europe and, in many cases, submitting a white paper to the relevant national authority before they can provide services in Europe. For small- to medium-businesses, there are exemptions to producing and submitting the white paper. Although the process is relatively straightforward, this is the first point where some frictions may be found.
MiCA is an EU instrument that seeks to provide authorization at EU level, but companies will need to request authorization in the country where they register and comply with other national rules in each country, limiting the benefits of MiCA.
For stablecoin issuers, there are stricter requirements than for crypto-asset issuers, including having more funds, limitations to provide interest with stablecoins, and in some cases observing additional rules on reserves. Another difference is that if a stablecoin is of significant relevance, supervision will be done by the European Banking Authority, not only by the national authority.
Another aspect of the directive that may raise questions in the near future is about the crypto products that are not regulated.
Non-fungible tokens (NFTs) and most of the products that are purely decentralized (i.e. DeFi) fall outside the scope of the directive. However, if a legal entity creates a platform to trade these products, that entity would be responsible for adhering to MiCA, and would need to register the product or service.
Given the growth of these products in the last year, after MiCA was proposed, it is likely that companies in this space may need additional guidance to enjoy a similar degree of certainty as other products covered by this regulation.
Another area that will likely require further explanation is the definition of crypto assets.
MiCA applies to crypto assets that are not considered financial instruments. Otherwise, they fall under EU financial rules. Unfortunately, there is no clear definition of which crypto assets are financial products and which are not.
The only reference to crypto assets in MiCA is that the products defined in Article 4(1), point (15), of Directive 2014/65/EU, the Directive on Financial Instruments, will fall outside the scope of MiCA. This includes securities, money-market instruments and derivatives, just to name a few, but it isn’t clear which category a crypto asset or a token should be.
For instance, a token given by a company to reward customer loyalty, similar to other loyalty point schemes, will be exempted from MiCA if the token issuer is the only one that can exchange it for a product or service. However, if the same token can be traded, it may be included under MiCA or other financial rules. There is no clear guidance on these sorts of circumstances.
In the U.S., the definition of a crypto asset as a security or a commodity or money has sparked a heated debate. The passage of MiCA could trigger the same discussion in Europe.