On 30 June, news broke that a provisional agreement had been reached between the Council and the European Parliament regarding the proposed regulation on crypto-asset markets (“MiCa“). The stated goal of this intervention is to protect investors and preserve financial stability, while enabling innovation and promoting the attractiveness of the crypto-asset sector. However, the announcement was not accompanied by the official text of the regulation. Indeed, this will have to wait until the formal approval process is completed.
However, we can take cognizance of some of the terms of the agreement, albeit general, from what was published in the Council’s press release of 30 June.
Distinction between types of stablecoins
The first important consideration concerns one aspect of the scope of the regulation. The release anticipates that MiCA will protect consumers by requiring issuers of stablecoins to establish a sufficiently liquid reserve, at a 1/1 ratio and partly in the form of deposits. The issuance and exchange of this type of token will be subject to the rules governing the operation of the reserve and will ensure adequate minimum liquidity. This mechanism is partly reminiscent of the regulation of electronic money, where it is envisaged that any stablecoin holder will be able to request redemption from the issuer at any time and free of charge.
The aim of the European institutions is to regulate so-called “asset-backed” stablecoins, such as Tether or USDC. On the other hand, algorithmic stablecoins, which maintain a stable value thanks to algorithmically managed minting and burning processes, provided that they are not pegged to one or more underlying assets, remain excluded, at least in accordance with the MiCa draft proposal already published by the European Commission. It will be interesting to see how this exemption will find application to algorithmic stablecoins, especially in the wake of the recent UST / Luna stablecoin case, which confirmed the higher degree of market and investor risk associated with precisely these types of crypto assets.
Exclusion of NFTs
The statement confirms the intention of the European institutions to exclude NFTs from the scope of MiCa, unless they fall into the categories of regulated crypto-assets.
A very important role will be played by the breadth of the definition of NFTs relevant to MiCa. The statement refers to “digital assets that represent real objects such as art, music and video“. NFTs that do not qualify as such based on the definition under MiCa could then be subject to the new rules (think for example of NFTs issued in multiple copies and representing rights to different types of performances).
The regulatory approach expressed in the release confirms the approach already envisioned in the original draft of MiCa from the perspective of authorization requirements. Cryptocurrency service providers will then need a license to operate in the territory of the European Union.
The authorization will be issued by the national supervisory authority within three months after the operator files the application.
Anti-money laundering obligations
it is confirmed that the MiCa will not contain provisions dedicated to anti-money laundering regulations. However, activities regulated by MiCa will be subject to AML regulations, which will soon be updated and adapted to cryptocurrencies as well.
In the meantime, the Council and the European Parliament have reached a provisional agreement on the extension of the so-called “travel rule” -which requires the sharing of information about customers and their transactions- to cryptocurrencies.
Finally, the statement touches on another area that has been the subject of heated discussion in the past months: the environmental impact produced by the operation of blockchain.
The discussion around the proposal to ban blockchains based on the proof-of-work system as being more energy-intensive than other mechanisms (such as, for example, proof-of-stake) is now a well-known issue. The proposal was rejected by the European Parliament and was the subject of a compromise. Operators will have freedom of choice over which blockchain to use but will have to declare information about their environmental and climate impact, according to guidelines to be prepared by the relevant European authority (ESMA).
What will change with MiCA
The information shared at the moment by European authorities seems to bode well for greater clarity in the approach to the issue of cryptocurrency regulation. Indeed, the presence of transparent regulation can support healthy market growth and foster the competitiveness of the European market. Operators in the sector will have to be authorized to operate by the relevant authorities and will have to comply with obligations imposed by anti-money laundering regulations.
However, there remain several areas of the crypto-asset world with respect to which MiCA will not introduce clear and unambiguous rules – at least according to the statement – with particular reference to DAOs (Decentralized Autonomous Organizations), DeFi platforms, staking and lending activities, NFTs and algorithmic stablecoins. In this respect, despite the lengthy work that led to its enactment – or probably precisely because of that laborious path – MiCa is in some ways already born in a rush with the times. But its approval is nonetheless good news for the development of this market.