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Non-fungible tokens (NFTs) and decentralised finance (DeFi) look set to remain untouched by the EU’s Markets in Crypto-Assets (MiCA) regulation, as seen by VIXIO.
Likely to be implemented next year, the MiCA is the EU’s first foray into developing a crypto-asset legal framework.
Originally thought to be targeting the likes of the now long-gone Libra/Diem project, work on the legislation arguably slowed as priorities were adjusted.
However, sources have suggested that the war in Ukraine provided more motivation from regulators to push forward with the text as concerns mounted that Russians were using crypto-assets as a method to evade the EU’s sanctions regime.
While the final text has been written up, it still needs to be proof-read and translated by the EU’s institutions before it is made available to the public.
Commenting on the final text, Robert Kopitsch, secretary-general of Blockchain for Europe, said that MiCA is going in the right direction.
"It creates clear rules for the industry, while ensuring consumer protection. It elevates the crypto ecosystem to the next level and that is really the game changer," he said.
Kopitsch pointed out that once MiCA is implemented, crypto-asset service providers will have licenses to cater to the biggest economic area with common standards.
Yet, one question remains, he said. "If you are not a big company, is MiCA such a blessing? MiCA will probably be more costly than it should be, as its final form is quite complicated.
"Unfortunately, that is what you get when 27 countries have to agree to one common rule set. Therefore, it is probably the best regulation we could have hoped for."
As pointed out by Kopitsch, when MiCA was first proposed, it was a lot leaner as a legal text. "This is always a good sign. Clear rules are usually short. The longer legal texts are, the more overwhelming and the more people have to get involved."
"What needs to be done now is to safeguard the intention of the political text," he said. "A lot of the text is trying to do the right thing but the final wording will be key to make it better or worse. This is the crucial final step."
NFTs and DeFi
VIXIO can reveal that new forms of crypto-related finance, such as NFTs and DeFi, have been left out of the MiCA.
“Where crypto-asset services as defined in this regulation are provided in a fully decentralised manner without any intermediary they do not fall within the scope of this regulation,” confirms Recital 22 of the regulation.
“This regulation covers the rights and obligations applicable to issuers, offerors and persons seeking admission to trading of crypto-assets and to crypto-asset service providers.”
The text does, however, compel the EU to assess the development of DeFi in the crypto-assets markets and the adequate regulatory treatment of decentralised crypto-asset systems on a periodic basis, meaning DeFi could eventually find its way into the scope of EU regulation.
With regard to NFTs, the document states: “This regulation should not apply to crypto-assets that are unique and not fungible with other crypto-assets, including digital art and collectibles, whose value is attributable to each crypto-asset’s unique characteristics and the utility it gives to the token holder,” the text says.
In addition, the text proposes that the European Securities and Markets Authority (ESMA) should issue guidelines to the market “to better understand cases in which crypto-assets that are otherwise considered to be unique and not fungible with other crypto-assets might be qualified as financial instruments”.
However, the text commits to “an assessment of the development of markets in unique and not fungible crypto-assets and of the adequacy of regulatory treatment of such crypto-assets, including an assessment of the necessity and feasibility of regulating offerors of unique and not fungible crypto assets as well as providers of services related to such crypto assets”.
The text also touches upon environmental issues that have been a hot topic in particular for the EU’s parliamentarians during the MiCA negotiations.
“The consensus mechanisms used for the validation of transactions in crypto-assets might have principal adverse impacts on the climate and other environment related impacts,” the text points out, suggesting that such consensus mechanisms should therefore deploy more environmentally friendly solutions and ensure that any principal adverse impact that they might have on the climate and any other environment-related adverse impact is adequately identified and disclosed by issuers and crypto-asset service providers.
As VIXIO reported on Wednesday (September 21), Ethereum, the world’s second-largest cryptocurrency and largest single blockchain ecosystem, completed its long-awaited transition to the low energy proof-of-work consensus.
When determining whether adverse effects are principal, account should be taken of the principle of proportionality and the size and volume of the crypto-asset issued, the text recommends, calling for ESMA, in cooperation with fellow supervisory authority the European Banking Authority (EBA) to be mandated to develop draft regulatory technical standards (RTS) to further specify the content, methodologies and presentation of information in relation to sustainability indicators. This includes measuring climate and other environment‐related adverse impacts, and to outline key energy indicators.
It is anticipated that once the final text is fully signed off by the co-legislators, MiCA will apply to market participants in a staggered manner, with wallet customers and virtual asset service providers having between 12 and 18 months to implement the new compliance requirements.
As one source wryly told VIXIO, this will make “a nice Christmas present for the market in 2023”.
