2.2.3 MiCA in a nutshell – rules and red tape
-62. MiCA then identifies specific activities it sets rules for, most notably (but not exclusively)
- For issuers:
a. Issuance of crypto-assets
b. Offering to the public crypto-assets
c. Seeking admission to a trading platform - For CASPs, ten different services are identified, most notably the following four:
a. Operation of a trading platform for crypto-assets
b. Exchange of crypto-assets for fiat currency
c. Custody and administration of crypto-assets on behalf of third parties
d. Providing advice on crypto-assets.
-63. Since, as I noted before, there are no crypto-assets which could be regulated as ARTs in operation and the provisions of the Regulation are so unenticing that no issuer will likely seek to offer an ART in the future, I consider Title III, which is dedicated to ARTs, of little relevance. One interesting angle is to look at ARTs as “money market funds using blockchain technology” but the burden of regulation is likely to deter innovation along this path that could have benefitted European citizens. Title IV is dedicated to EMTs and sets for EMT-issuers requirements which are so onerous as to make it doubtful that a profitable business model can be found in the EU. Indeed, I have also remarked above in par. 46 that MiCA appears to target a near-complete suppression of EMTs, hence I also consider this Title to be of secondary significance for the purposes of Part 2. I will revisit the topic in Part 3, section 3.2.1.
-64. The rules applying to issuers of crypto-assets other than ARTs and EMTs are laid down in Title II. In this analysis, I am casting them against the current, pre-MiCA situation.
-65. The central obligation of issuers concerns the drafting, prior notification to competent authorities, and publication of a crypto-asset white paper. This has been the case for as long as crypto-assets existed, beginning with the Bitcoin paper, published on October 31st, 2008 (except of course for the prior notification to competent authorities). Overall, the detailed rules governing the white paper appear to follow and officialise existing best practice, but with major exceptions which I’ll detail in the next chapter.
-66. When the rules stray from the current best practice, they tend to discriminate against blockchain technology and DLT based projects, like in the “vouchers” example from the previous section. Another illustration is that under the Prospectus Regulation an issuer can be exempted from the obligation to publish a prospectus when raising up to 8 000 000€ over 12 months, whereas the threshold is of only 1 000 000€ for crypto-asset issuers under MiCA – Art. 4(2 b). The rules also add costs, delays, and legal complexity to the process, as illustrated by the requirements that:
- the crypto-asset white paper be made available in machine readable formats (yet to be defined) – Art. 6(10).
- the issuer allows 20 working days for the competent authority to raise possible objections – Art. 8(5).
- the issuer aiming to raise more than 1 000 000€ over a 12-month period must, among other obligations, “maintain all of their systems and security access protocols to appropriate Union standards.” (yet to be defined by ESMA and EBA) – Art. 14(1 d.); in practice, many successful crypto-assets have been issued prior to MiCA where the issuer was maintaining little more than a static web site, as its main system was the public blockchain itself.
- the issuer explains to the competent authority why the crypto-asset is neither a financial instrument, electronic money, deposit, nor a structured deposit under applicable legislation – Art. 8(4). Bitcoin was issued by one (or several) computer specialists and the majority of the most successful crypto-assets were issued by teams of computer professionals, not versed in legal matters. This rule in particular requires the provisioning of specialist legal services by the issuer, at additional cost, clearly not “supporting innovation” and also adding “regulatory uncertainty” in case the competent authority objects to the conclusions of the issuer’s legal counsel. With respect to other MiCA objectives, it is not clear how imposing such an obligation on the issuer improves “consumer protection” and it’s also not immediately apparent that it contributes to “financial stability”. As for “legal certainty”, MiCA’s first objective, one could have imagined that the competent authority possesses more resources than a start-up, and the necessary legal expertise to perform that analysis itself, and possibly communicate its conclusions to the issuer afterwards. Furthermore, INATBA had drawn attention, in its answer to the public consultation, to the risk of “inconsistent categorization of certain crypto-assets from one Member State to another, or indeed confusion as to whether a crypto-asset falls under MiCA or MiFID II.” INATBA considered in 2021 that this was the first priority that had to be addressed. In the final version of the Regulation, Art. 2(5) has been modified to read: “By … [18 months after the date of entry into force of this regulation], ESMA shall […] issue guidelines […] on the conditions and criteria for the qualification of crypto-assets as financial instruments.” Yet, as Recital (14) makes clear, “Offerors or persons seeking admission to trading are primarily responsible for the correct classification of crypto-assets, which might be challenged by the competent authorities, both before the date of publication of the offer and at any time thereafter.” Such a provision manages to be both innovation-adverse and to increase the regulatory uncertainty, basically contradicting the first two of the four professed goals of the Regulation. It is unclear whether this provision might jeopardize the prized “passporting rights” across the Union, giving the competent authority in a Member State the right to object to a classification previously accepted by the authority of another Member State.
-67. CASPs will need an authorisation from competent authorities to offer crypto-asset services under MiCA. The authorisation and operating conditions are laid down in Title V. CASPs are centralized entities acting as financial intermediaries, offering virtual “bridges” toward the “stateless” world of decentralized crypto-assets. The requirements imposed on them concern:
- the suitability of the management board,
- the corporate governance structure,
- the security and resilience of the IT infrastructure, and
- the capital reserves.
-68. These requirements appear broadly comparable with those put on traditional financial intermediaries and seem fully justified by the high standards of consumer protection which the EU aims to achieve.
-69. However, MiCA allows existing credit institutions authorised under Directive 2013/36/EU and investment firms authorized under Directive 2014/65/EU (MiFID II) to offer crypto-asset services without prior authorization. This is considered by INATBA as distorting the level playing field by favouring incumbent firms with little justification. They note: “Knowledge of the DLT technology and risks related to crypto-assets differs from those applicable to traditional financial instruments. It should not be assumed that credit institutions can operate safely in crypto-asset markets based on their experience in markets for financial instruments alone. Such assumption can ultimately result in a risk to consumers.” The paper by van der Linden and Shirazi quoted earlier (Part 2, par. 56) counts this “uneven player field that gives larger players, particularly credit institutions and investment firms a competitive advantage” among the concerns that taken together may outweigh the benefits of the regulation.
-70. In section 2.1.2 above (Part 2, par. 20) I was observing that a careful lecture of the “Digital Finance Strategy” communication suggested that the EU Commission was committed to protecting incumbents from disruptive innovation, and this instance here is just one illustration. Indeed, that the crypto-assets are markedly different from financial instruments is implicit in the very existence of MiCA – why create a new regulation if they are similar? Yet somehow this argument is suspended when the opportunity to favour the incumbent financial operators over innovators presents itself.
-71. It should nevertheless be acknowledged that the final version imposes at least a notification obligation in Title V Art. 60 “Provision of crypto-asset services by certain financial entities” whose first paragraph reads: “A credit institution may provide crypto-asset services if it notifies the information referred to in par. 7 to the competent authority of its home Member State, at least 40 working days before providing those services for the first time.”
-72. MiCA also introduces simplified authorization procedures for CASPs already authorized under an existing national licensing scheme. Once authorized in one Member State, a CASP can provide services throughout the EU.
-73. In terms of costs, the Commission’s Impact Assessment estimates the one-off costs for the white paper to 35.000 – 75.000€. For CASPs, the one-off compliance costs are estimated (depending on the type of services for which authorisation is sought) between 2.8 – 16.5 million €, while on-going compliance costs are estimated to range between 2.2 – 24 million €. This sets already the bar very high and is bound to seem daunting to any aspirant entrepreneur. Note that the same paper reckons the estimated costs for ARTs and EMTs issuers are “considerably higher” still, which corroborate the general impression that MiCA attempts to discourage potential issuers of such tokens from setting up in the EU.
-74. To sum up, MiCA’s rules for crypto-assets other than ARTs and EMTs are based on prior best practice overall. However, their provisions expand and generalize the obligations in ways which are more demanding than for comparable activities that do not use DLT, thus again discriminating against the use of blockchain technologies, and they also skew the playing field in favour of large incumbent firms. Moreover, they add significant costs, impose delays, and add both legal and regulatory uncertainty, contrary to the stated objectives of the regulation. For ARTs and EMTs the rules are so onerous, they all but guarantee that no new entrant will try to use them for issuing such tokens (although once again incumbents are cuddled, get significant waivers, and might want to take advantage of the opportunity offered by the Regulation, which I discuss in Part 3).
-75. Thus, in this chapter I argued that, according to the regulatory doctrine of the US, the most successful technological innovators, “supporting innovation” relies on “principles-based regimes that give firms latitude to identify the best solution to the public policy problem” rather than on rigid legislation, that it can only be done at the expense of lowering the ambition (albeit not necessarily renouncing) to “protect consumers”, and that, reciprocally, focusing on “consumer protection” will inevitably stifle innovation. Hence not only are MiCA’s objectives inconsistent, but the inherent tension between “supporting innovation” and “consumer protection” is not even acknowledged by the legislator.
-76. Furthermore, MiCA raises serious doubts with respect to its ability of bringing legal certainty, flouts the principle of technology neutrality by imposing additional requirements specifically when blockchain technologies are used, skews the competitive playing field against new entrants and in favour of the incumbents, and addresses its fourth objective of ensuring financial stability by setting such onerous requirements for the issuance of ARTs and EMTs in the EU that it effectively forbids them in all but name, despite empirical evidence that EMTs can be more resilient and bear less risk for financial stability than regulated financial institutions.
-77. In the next chapter I will analyse MiCA’s provisions in more detail, through the lens of the triple nature of “blockchain innovation” as laid out in Part 1 and reveal the profound contradictions at the core of the regulation.
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[136] REGULATION (EU) 2017/1129 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, and repealing Directive 2003/71/EC
[137] INATBA POLICY POSITION ON MARKET IN CRYPTO-ASSETS (MICA) REGULATION, 2021, op. cit.
[138] Regulation of the European Parliament and of the Council on markets in crypto-assets, op. cit.
[139] INATBA POLICY POSITION ON MARKET IN CRYPTO-ASSETS (MICA) REGULATION, 2021, op. cit.
[140] T. van der Linden, T. Shirazi, op. cit.
[141] Commission Staff Working Document Impact Assessment, SWD(2020) 380 final
[142] K. Werbach, op. cit.