2.2.2 MiCA in a nutshell – definitions and scope
-56. In this section we are going to focus on definitions and scope: to what/whom does MiCA apply:
a) Types of crypto-assets
b) Actors of the ecosystem, both traditional and new.
-57. It should first be noted that MiCA aims to fill alleged gaps in an otherwise heavily regulated finance domain. In that respect, it flanks MiFID II and it takes care not to overlap with it, but it also refers to the “Transfer of Funds Regulation” (TFR), the proposed “Anti Money Laundering Regulation” (AML), and the “E-Money Directive” (eMD). Other financial regulations complete the legal landscape, such as the “Deposit Guarantee Schemes Directive” , the “Money Market Funds Regulation” and the “Vouchers Directive” (see below). MiCA is accompanied, as part of a package of measures, by the smaller and more specific “DLT Pilot Regime Regulation”.
-58. MiCA is designed to apply to:
- “Crypto-assets” which are not covered by other regulations such as MiFID II, deposits (including structured deposits), funds, Regulation 2017/2402 on securitisation positions , insurance or pension products. It is commendable that, unlike the initial Proposal, the final version of the legislation specifically mandates ESMA to issue guidelines on conditions and criteria for the qualification of crypto-assets as financial instruments (Title I, Art 2(5)). Crypto-assets are defined as “a digital representation of a value or a right that is able to be transferred and stored electronically using distributed ledger technology or similar technology.” Unlike the initial Commission Proposal that only mentions “(1) ‘distributed ledger technology’ or ‘DLT’ means a type of technology that support the distributed recording of encrypted data;”, the final version of the Regulation goes into more detail with respect to what constitutes “distributed ledger technology” by introducing two essential concepts: “network nodes” and “consensus mechanism”. Unfortunately Art. 3.1(3) dealing with the latter fails to mention the essential feature of a consensus mechanism: agreeing on the order of transactions. Definitions remain thus relatively generic and require clearer delimitation in subsequent regulatory technical standards if MiCA is to get closer to its stated first objective, “legal certainty”. Firstly, this point is raised in a recent study which concludes that “the broadness of crypto-asset definitions”, among several other concerns, “may outweigh the benefits of the regulation.” Secondly, it is encouraging that the final version of the regulation has markedly improved compared to the initial Commission Proposal, replacing for instance the formulation “which may” in the September 2020 version with the more precise “that is able to” in the latest version adopted by the European Parliament and endorsed by the Council. The definition of what constitutes “distributed ledger technology” has also markedly improved compared to the rather generic “supports the distributed recording of encrypted data” in the initial proposal. Importantly for projects which might find the cost of complying with MiCA unaffordable (more on this later), the added precision contributes to determining what technology is not considered DLT nor similar. The definitive answer will probably be left up to regulators to decide through implementing legislation, or on a case-by-case basis for projects which aim to comply with the regulation, and to courts to decide for projects claiming not to fall under the scope of the regulation, a situation not very different from the one existing prior to MiCA, thus belying the stated objective of “legal certainty”.
- “Utility tokens”, “a type of crypto-asset that is only intended to provide access to a good or service supplied by its issuer”. Confusingly, utility tokens could also qualify as “vouchers” under the “Voucher Directive”, in which case a DLT-based voucher (utility token) would face more onerous legal obligations than a non-DLT voucher, not exactly inviting for “blockchain innovation” and contradicting Recital (6): “Union legislation on financial services should not favour one particular technology” (Proposal) / “The Union framework for markets in crypto-assets should not regulate the underlying technology. Union legislative acts should avoid imposing unnecessary and disproportionate regulatory burden on the use of technology […]” (final version). In the case of digital “instruments where there is an obligation to accept it as consideration or part consideration for a supply of goods or services and where […] the identities of their potential suppliers are indicated […] in related documentation” (i.e., “vouchers”), any such instrument not using DLT nor similar technologies is favoured, as it doesn’t have to, in addition to other obligations, also comply with MiCA.
- “Asset-referenced tokens” (ART) – a category which remains mostly hypothetical to this day and for the foreseeable future. Indeed, to the best of my knowledge, there are no widely publicized plans for an issuer to offer such a crypto-asset to the public anytime soon. Commentators, including Patrick Hansen, observe that the ART category was identified in response to Facebook’s (now Meta) publicized plans to issue a crypto-asset baptised “Libra”, which would have qualified as an ART. Facebook has long abandoned those plans, and no other issuer has publicly shown appetite for issuing an ART, which might be telling as concerns support to blockchain innovation. The final version of the MiCA regulation implicitly acknowledges the irrelevance of the category in Recital (18) (which was Recital (9) in the initial Proposal): “The second type […] ‘asset-referenced tokens’ covers all other crypto-assets, other than e-money tokens, […] so as to avoid circumvention and to make this Regulation future-proof.” Algorithmic stablecoins were explicitly not considered ARTs by the initial Proposal (Recital (26)), but were included in scope in the final version (Recital (41)) which makes clear that the MakerDAO “DAI” would have been considered an ART (it is backed by ETH, a crypto-asset) and its admission to trading would have been seriously hampered in the Union had it been issued after the Regulation. MiCA’s “Management measures” allege that there are, as of 2020, “24 ARTs in operation”, yet it does not spell them out. If they are still in operation, they are likely small or very small.
- “Electronic money tokens (e-money tokens)” (EMT) – the typical centralized stablecoins, 99% of the value of which is today denominated in USD. Facebook’s (now Meta) second generation crypto-asset, called Diem, would have qualified, but in February 2022 Meta shut down the project and sold its assets to a bank which has since been taken into receivership (Silvergate bank). In addition, the major stablecoins such as Tether (USDT), USD Coin (USDC), Paxos Dollar, and Gemini Dollar fall in this category. It is interesting to note that for EMTs, MiCA applies in addition to the EMD, which again contradicts Recital (6), as it discriminates against blockchain technology by submitting blockchain-based e-Money to more rules than non-blockchain e-Money – see also Recital (19) in the final version , stating “Because e-money tokens are crypto-assets and can raise new challenges in terms of protection of retail holders and market integrity that are specific to crypto-assets, they should also be subject to the rules laid down in this Regulation to address those challenges”.
-59. As concerns the recipients of the regulation, MiCA identifies several concerned actors such as “issuers” of crypto-assets, “crypto-asset service providers” (CASP, where “crypto-asset service” includes operating a trading platform, custody and administration, advice, etc.), the general “public” as well as “qualified investors”, and actors of the traditional finance world such as “credit institutions” and “investment firms” (the incumbents).
-60. It should be acknowledged that the final version of the legislation markedly improves over the initial proposal by vastly expanding and detailing the definitions, and mandating that “The Commission shall adopt delegated acts […] to supplement this Regulation by further specifying technical elements of the definitions […], and to adjust those definitions to market developments and technological developments.” - Art. 3(2), unlike the weaker formulation “The Commission is empowered to adopt delegated acts […]” in the initial proposal.
-61. To sum up, the definitions provided remain relatively generic at this stage, to the point of endangering MiCA’s first objective of “legal certainty”. At the same time, the relationship between MiCA and other financial legislation is currently insufficiently clear, which can cause confusion. Whenever comparisons are possible, observers have noted that MiCA flouts the principle of “technology neutrality” despite expressly reaffirming it in Recital (6), by discriminating against blockchain technologies. However, it is encouraging that the final version markedly improves over the initial proposal.
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[125] REGULATION (EU) 2015/847 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 20 May 2015 on information accompanying transfers of funds and repealing Regulation (EC) No 1781/2006
[126] Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, COM(2021) 420 final
[127] DIRECTIVE 2009/110/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 16 September 2009 on the taking up, pursuit and prudential supervision of the business of electronic money institutions amending Directives 2005/60/EC and 2006/48/EC and repealing Directive 2000/46/EC
[128] DIRECTIVE 2014/49/EU OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 16 April 2014 on deposit guarantee schemes
[129] REGULATION (EU) 2017/1131 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 14 June 2017 on money market funds
[130] COUNCIL DIRECTIVE (EU) 2016/1065 of 27 June 2016 amending Directive 2006/112/EC as regards the treatment of vouchers
[131] REGULATION (EU) 2022/858 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 30 May 2022 on a pilot regime for market infrastructures based on distributed ledger technology, and amending Regulations (EU) No 600/2014 and (EU) No 909/2014 and Directive 2014/65/EU
[132] REGULATION (EU) 2017/2402 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 12 December 2017 laying down a general framework for securitisation and creating a specific framework for simple, transparent and standardised securitisation, and amending Directives 2009/65/EC, 2009/138/EC and 2011/61/EU and Regulations (EC) No 1060/2009 and (EU) No 648/2012
[133] T. Van der Linden, T. Shirazi, “Markets in crypto-assets regulation: Does it provide legal certainty and increase adoption of crypto-assets?” Financial Innovation 9:22, 2023, https://doi.org/10.1186/s40854-022-00432-8
[134] Regulation of the European Parliament and of the Council on markets in crypto-assets, op. cit.
[135] Regulation of the European Parliament and of the Council on markets in crypto-assets, op. cit.