New draft EU regulation governing crypto-assets leaked

Last month a proposal for a regulation on markets in crypto-assets (MiCA) was leaked to the press. It is a 168-page document with 114 articles. The proposal sets out four main objectives. First, to provide legal certainty and regulatory clarity for all crypto-assets not yet 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.

Broadly, 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.

Achieving those objectives requires a definition of what a crypto-asset actually is. The draft MiCA Regulation defines it as “a digital representation of value or rights, which may be transferred and stored electronically, using distributed ledger or similar technology.” That definition is wide, so as to cover all crypto-assets not already covered by other EU regimes.

The proposal also divides crypto-assets into three subcategories: utility tokens, asset-referenced tokens and e-money tokens. Utility tokens are tokens intended to provide digital access to an application, service or resource available on a distributed ledger, accepted only by the issuer of that token to grant such access. Asset-referenced tokens are intended to be used as a means of exchange and to keep a stable value by referring to the value of one or more fiat currencies, commodities or crypto-assets. E-money tokens are 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, covering a wide range of services and transactions relating to crypto-assets.

The draft MiCA Regulation is detailed, comprehensive and broad. It may prove a positive step towards a framework within which the industry can move on to the next stage of development for applications built on distributed ledger technology (DLT) and blockchain. Hopefully, this will promote higher transaction volumes and wider geographical adoption. That being said, the current version raises some concerns. The system of compliance and legal requirements it describes may be too costly and complex for such a young industry to meet. To stop innovation moving away from the EU, exactly the opposite of what is intended, later reviews may need to make the regime more supportive.

The regulation in its current form also does not yet apply to financial instruments, which leaves out many current and future decentralised finance (DeFi) instruments. That may mean those markets are no longer accessible to Europe and its citizens, which may again stifle innovation. A future review may address the tokenisation of tradable shares, profit rights and interest swaps, since 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 an EU-wide framework for the offering of crypto financial instruments not yet uniformly regulated under the EU Prospectus Regulation. Those concern investments of less than €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 at the forefront of DeFi instruments.”

In sum, 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.