The new European regulation for crypto called MiCa


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Final approval by the European Parliament of the new regulation on crypto-assets, the 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 submitted by the European Commission in September 2020, so it has been two and a half years since then.

However, by now the final draft appears to be ready to be brought to Parliament for final approval. Once approved, it will take 18 months from the date of entry into force to trigger the compliance obligation, which then presumably should come in the second half of 2024.

It was actually as early as June 2022 that 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 issue around NFTs

The final draft of the MiCA regulation divides crypto-assets 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 in fact considered payment tokens, but for NFTs things get complicated.

In fact, this category of digital assets still has uncertainties, so much so that there is still debate about whether or not to include them in the scope of this new directive.

They are definitely not payment tokens, because they are not fungible. 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.

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

Currently, they do not appear to be explicitly included in the scope of the MiCA, but apparently the legislature’s idea is to actually impose compliance with the new regulations on non-fungible tokens as well.

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

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 curious thing is that non-fungible tokens are now a native feature of several blockchains, so it would seem odd that they would not be considered in what would like to be a general regulation for crypto-assets.

The application of MiCA to the crypto market

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

At that point, compliance with this regulation will become mandatory for all natural and legal persons involved in issuing, trading and providing crypto services within the European Union.

At this time, the exact scope of application does not yet seem to be clear, because the regulation speaks of “services related” to cryptocurrencies, meaning in theory all services that in some way fall within the cryptocurrency sector.

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

For example, would software houses that create non-custodial wallets fall under the obligation to comply with the MiCA regulation, even though 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 truly responsible for its management, or does it apply only to centralized entities acting as intermediaries?

The most popular assumption seems to be the latter, not least because it is extremely difficult to impose external regulations 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 them.

It is worth noting that centralized virtual currency operators have long been subject to the scrutiny of the authorities, 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 regulatory framework

Over the course of the months in which the draft of the European Union’s new MiCA regulation has been drafted, many people involved in the crypto industry have protested.

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

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 retrogression and a missed opportunity for evolution.

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

It is important to remember that in Europe, although outside the EU, there 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 may end up further favoring precisely Switzerland, to the detriment of 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 contiguous with 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.