The European Commission’s 2020 proposal for a Regulation on Markets in Crypto-Assets (MiCA) formed part of the EU Digital Finance package, which also included a proposal for a pilot regime on distributed ledger technology (DLT), a proposal for a digital operational resilience Act (DORA) as well as a proposal to amend certain existing EU financial services legislation – in particular the Markets in Financial Instruments Directive (MiFID II).
On 30 June 2022 the European Commission adopted a new digital strategy themed as the ‘Next Generation Digital Commission’[i] increasing the focus on set of principles such as digital by default, security and privacy, openness and transparency, data driven and more importantly user-centric.
Following a provisional agreement between the European Council and the European Parliament, which coincided with the European Commission’s new digital strategy announcement, a final agreement was reached on the full text of MiCA on 5 October 2022 which was later formally approved by the European Parliament.
Essentially adopting a ‘substance over form’ approach, MiCA is set to cover those crypto-assets that fall outside the existing financial services legislation, with the European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA) given central roles in setting technical guidelines and standards determining classifications. The Regulation puts in place set of obligations for crypto-asset issuers, offerors and service providers (CASPs).
Non-fungible token (NFT) models which are uniquely identified will in principle be exempt from the scope of MiCA, so will decentralised finance (DeFi) applications which can operate without any intermediary.
Nevertheless, despite their formal form, a reclassification may be possible for those NFTs which could in practice have the potential to become fungible, and hence qualify as financial instruments. In particular, fractions of NFTs and serial issuances may be a strong indicative of fungibility of those assets, whereby a mere attribution of a unique identifier to a crypto-asset may not be sufficient for its qualification as an NFT.
Equally, non-transferable crypto-assets are exempt from the scope of the Regulation such as soulbound token (SBT) models, which represent a person’s identity and personal traits, or loyalty schemes, next to those crypto-assets that are offered for free[ii] or are airdropped. Contrary to the original text, algorithmic stablecoins are no longer explicitly excluded from the scope, and instead the rules apply “irrespective of how the issuer intends to design the crypto-asset, including the mechanism to maintain a stable value.”[iii]
On a different note, in order to monitor carbon footprint, CASPs will now be required to also disclose energy consumption and environmental impact of their respective protocols. A much toned down language compared to an earlier draft proposing a complete ban on mining related to the proof-of-work (PoW) mechanism.
In case the provision of a crypto-asset service is carried out in a fully decentralised manner without any intermediary,[iv] such will fall outside of the scope. Similarly, where crypto-assets have no identifiable issuer, they would not fall within Titles II, III and IV of the Regulation, whereas CASPs providing services to such crypto-assets would remain fully covered.
Complementary to MiCA, the proposal for a Regulation on Transfer of Funds (TFR) as part of the EU anti-money laundering regime also received a provisional agreement[v] between the European Council and the European Parliament on 29 June 2022. Integrating the ‘travel rule’, and in compliance with recommendations 15 and 16 of the Financial Action Task Force (FATF), the Regulation aims to extend the scope of rules to transfers of crypto-assets, whereby CASPs will be obliged to collect and make accessible certain information about the originator and the beneficiary of the transfers of crypto-assets they operate, an obligation similar to that of payment service providers. Importantly, there is no set minimum threshold, hence no exemption for low value transfers.
Notably, these rules will be read without prejudice to the EU General Data Protection Regulation (GDPR).
In this context, unhosted (private) wallets still fall under the scope where there is an interaction between the former and CASPs for any transfer above EUR 1,000. Such a strict and blanket financial surveillance regime, even without any indication of a suspicious activity, seems to have the potential to disproportionately affect players in the sector.
On the other hand, peer to peer trading between unhosted (private) wallets, in the absence of any CASPs, will not be caught by the rules.
The legislative package is set to enter into force and be applicable by 2024.
Last but not least, it is evident that also third country entities[vi] which solicit their services and activities to users and clients established or situated in the EU would be directly affected, whereby ESMA will be the authority to put forward guidelines determining when precisely an entity is deemed to be soliciting.
[ii] Article 4.2 MiCA (text of 5 October 2022), “crypto-assets shall not be considered to be offered for free where purchasers are required to provide or to undertake to provide personal data to the offeror in exchange for those crypto-assets.”
[iii] Recital 26 MiCA (text of 5 October 2022)
[iv] Recital 12a MiCA (text of 5 October 2022)
[vi] Article 53b MiCA (text of 5 October 2022)