The new EU regulation for crypto called MiCa

The new EU regulation for crypto called MiCa

Final approval by the EU Parliament of the new regulation on crypto-assets, so-called MiCa (Markets in Crypto-Assets), is expected in the coming weeks, i.e. by the end of April.

The first proposal for the MiCA Regulation was delivered by the European Commission in September 2020, so two and a half years have passed since then.

Now, however, the final draft appears ready to be brought to Parliament for final approval. Once approved, it will take 18 months from the effective date to trigger the compliance obligation, which would then presumably come in the second half of 2024.

It was actually as early as June 2022 that a provisional agreement was reached between the Council and the European Parliament, but since then the final approval date has slipped several times.

The fact is that there are still some unclear points, and one of them, namely NFTs, is apparently still under discussion.

The problem around NFTs

The final draft of the MiCA regulation divides cryptoassets into three categories, namely e-money tokens, utility tokens and asset-referenced tokens.

Cryptocurrencies such as Bitcoin and Ethereum fall under the first definition, meaning they are effectively considered payment tokens, but for NFTs, things get complicated.

Indeed, this category of digital assets remains uncertain, so much so that there is still debate as to whether they should be included in the scope of this new directive.

They are definitely not payment symbols, because they are not interchangeable. They are also not considered utility tokens, except perhaps in rare exceptions, but in themselves they are also not tokens that represent other assets, such as stablecoins, except in some cases.

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So either they are introduced with a new category or they should be treated separately.

Currently, they do not appear to be explicitly included in the scope of MiCA, but apparently the legislator’s idea is to actually mandate compliance with the new regulations also for non-fungible tokens.

It is worth noting that in the final draft expected to go for approval in April, there is still no specific category dedicated to NFTs, so if it were to go to court as it stands, the new regulation would apply to NFTs. in a forced manner.

Alternatively, European regulators still have some time to add to the draft, perhaps a section explicitly dedicated to NFTs, or to expand the section on asset-referenced tokens to include those NFTs that are not used as certificates representing external assets .

However, the odd thing is that non-fungible tokens are now a natural feature of several blockchains, so it seems strange that they would not be considered in what wants to be a general regulation of cryptoassets.

The application of MiCA to the crypto market

As mentioned above, the actual enforcement of the MiCA regulation will have to wait until at least the second half of next year.

At that time, compliance with this regulation will become mandatory for all natural and legal persons involved in the issuance, trading and provision of crypto services within the EU.

At this point, the exact scope of application does not yet seem to be clear, because the regulation speaks of “services related” to cryptocurrencies, and in theory means all services that fall in one way or another within the cryptocurrency sector.

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The fact is that these would include precisely all services related to the crypto sector, without a clear boundary that delimits how far the regulation goes, and where the obligation to comply with it ends instead.

For example, would software houses that create non-custodial wallets fall under the obligation to comply with the MiCA regulation, even if they do not act as intermediaries? Would DeFi protocol operators fall under the obligation to comply with the new directive?

That is, does it also apply to decentralized services, where there is no intermediary really responsible for its management, or does it only apply to centralized entities that act as intermediaries?

The most popular assumption seems to be the latter, not least because it is extremely difficult to impose external rules on decentralized services, but since the regulations also apply to individuals, those who have some role of responsibility in any crypto project may still have to comply with. with them.

It is worth noting that centralized virtual currency operators have long been subject to government control, for example through mandatory registration, so whether these entities are obliged to comply with MiCA regulation is beyond doubt.

Centralized exchanges, and all intermediaries that hold third-party cryptocurrencies, actually fall into this category.

Protests over the new regulations

During the months that the draft of the EU’s new MiCA regulation has been prepared, many people involved in the crypto industry have protested.

From the outset, the proposed new regulations were seen as overly rigid and intrusive, and not innovative, to say the least.

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What crypto operators fear is that the obligation to comply with the MiCA regulation will force them to incur more costs, thus having to pass them on to customers.

Moreover, it seems more like a trivial adaptation of the crypto market to the traditional one, i.e. an attempt at regression and a lost opportunity for evolution.

As of today, the EU is not a particularly favorable place for crypto operators, but with the new rules, paradoxically, it may become even less so.

It is important to remember that in Europe, although outside the EU, it is Switzerland, i.e. one of the world’s major crypto hubs, which has already been able to adapt to these new innovations for years. The risk is that MiCA could end up further favoring Switzerland in particular, to the disadvantage of the EU countries.

Outside of Europe, there is Dubai and the United Arab Emirates (UAE), which are working hard to become a crypto hub, and the Middle East is actually connected to Europe. So from this point of view the EU will not only suffer from internal competition within Europe from Switzerland, but also from external competition from the UAE.

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