09 Feb MiCA – Choice of Legislative Instrument and Scope
1. Choice of legislative instrument
One of the first things to appreciate about MiCA is that this legislative document takes the form of a Regulation. Unlike Directives, Regulations are a form of EU law instrument that is directly applicable in all Member States and does not need to be transposed domestically. The choice of Regulation was made deliberately in order to lay down a framework of rules that is immediately and uniformly applicable throughout the single market. This type of legislative act allows for greater degree of harmonization, as it omits the risk of diverging national law transpositions, and ensures a smoother Union-wide passporting procedure for crypto-assets and crypto related services.
Mica establishes the essence of the new crypto-assets framework that will not change until the adoption of further amendments by the European Parliament and Council. MiCA foresees that the Commission will retain the right to change certain technical details even after MiCA enters into force. This will be done via delegated acts, which will implement modifications that revise the thresholds above which asset-referenced tokens are classified as significant, specify how to calculate the supervisory fees chargeable by the European Banking Authority (EBA), and adjust certain definitions contained by the Regulation to reflect market and technology developments. Such delegated powers to the EU Commission are perfectly normal and serve to fine-tune Regulation provisions by accommodating the practical realities emerging post adoption. They are limited by the power of the European Parliament and Council to object to their implementation.
The MiCA draft Regulation applies to all issuers of crypto-assets and services related to crypto-assets in the Union. Its definitions are designed to encompass the widest range of crypto-assets possible in order to capture all blockchain products currently falling outside the scope of EU financial legislation. Furthermore, in line with the Union’s objective to pursue international regulatory coordination in the crypto sector, the definition of terms such as ‘crypto-asset’ and ‘DLT’ have been devised to conform to the definition of ‘virtual asset’ set out by the Financial Action Task Force Recommendations. This setup will help authorities address money laundering and terrorist financing issues raised by crypto-assets at the international level and in the future facilitate the offering of DLT products and services across jurisdictions.
MiCA’s scope is limited by the exemptions to the Regulation listed under Article 2. Broadly speaking, these exemptions divide into two groups. The first group consists of exemptions that apply to crypto- assets qualifying as financial instruments, electronic money, and deposits. For better clarity, tokens that offer holders profit or voting rights, equal to shares and bonds, classify as financial instruments and are out of scope of MiCA. Electronic money, on the other hand, must be tied to a fiat currency and redeemable upon request from the issuer.
And finally, deposits and structured deposits resulting from money left in an account contractually which are repayable at par value by the holding institution. As long as crypto-assets fall under one of these definitions, they are regulated by existing financial legislation pertaining to that specific field, and outside of MiCA’s scope avoiding overlaps.
The second group of exemptions applies to trusted entities and persons. Among these are public bodies such as the European Central Bank, the European Investment Bank and all national central banks of the EU Member States. Similarly, insurance and reinsurance undertakings would benefit from the exemption when acting in the course of their business as well as liquidators or administrators when acting in the course of insolvency procedures. MiCA will also not apply to situations where companies provide crypto-asset services internally, as would be the case with subsidiaries providing crypto-asset services exclusively to their parent companies or other subsidiaries belonging to the same corporate group.
3. Excluded categories of crypto-assets
In addition to the exemptions listed under Article 2 regarding overlap with other regulations and regarding the issuing entity, the scope of MiCA is also limited by exceptions regarding the offer of the crypto-assets and the rights attached to crypto-assets.
Thus, an exemption applies to crypto-assets which are unique and not fungible with other crypto-assets (article 2(2a)). These non-fungible tokens (or NFT’s) are a unique digital identifier which cannot be copied, mutually interchanged, substituted or subdivided. This means that the fractional parts of a unique and non-fungible crypto-asset should not be considered unique and not fungible. Also, the sole attribution of a unique identifier to a crypto-asset is not sufficient to classify it as unique or not fungible, the assets or rights represented should also be unique and not fungible for the crypto-assets to be considered unique and not fungible (Recital 6c). A large collection of digital art with minor changes between the pieces of art itself might, when following this specification, still be regulated by MiCA.
Additionally, an exemption applies to crypto-asset services as defined in MiCA, but provided in a fully decentralized manner without any intermediary, as mentioned in recital 12a.
In recital 14b, another group of exemptions is mentioned. Crypto-assets that are offered for free or that are automatically created as a reward for the maintenance of the DLT or the validation of transactions in the context of a consensus mechanism are exempt. No requirements of MiCA should apply to the offering of these crypto-assets. Another group of exemptions is also mentioned in recital 14b. When a utility token represents the purchase of an existing good or service, enabling the holder to collect the good or use the service, and when the holder of the crypto-assets has the right to use them in exchange for goods and services in a limited network of merchants with contractual arrangements with the offeror, this exemption applies.
4. Different types of tokens and service providers covered
Having examined the scope of MiCA and the types of tokens, entities and persons falling under its exemptions, we must turn to the remaining classes of crypto-assets and service providers that are within the remit of MiCA. Accordingly, the four main categories of assets affected by MiCA are:
- Cryptocurrencies (e.g. Bitcoin, Ethereum and Litecoin) – DLT-based instruments of payment that can be transferred and stored electronically, and whose prices fluctuate freely in response to market demand;
- E-money tokens (e.g. EURS, USD Coin and Tether) – DLT-based instruments of payment, which refer their price to a single fiat currency and stabilize their value by maintaining asset reserves to back up redemption requests by users;
- Asset-referenced tokens (e.g. Saga and Digix Gold) – DLT-based instruments of payment, which refer to baskets of fiat currencies, commodities, and even other crypto-assets and aim to stabilize their value by maintaining asset reserves to back up redemption requests by users;
- Utility tokens (e.g. Filecoin, Binance Coin and Flow) – DLT-based instruments designed as means of granting digital access to applications, resources and services provided exclusively by their respective issuers.
Similarly, the types of services covered by MiCA will be as follows:
- custody and administration of crypto-assets on behalf of third parties, as provided by virtual wallets that directly control crypto-assets or access to private cryptographic keys;
- operation of trading platforms for exchange of crypto-assets against fiat currencies or other crypto-assets as well as all related brokerage activities, such as executing and transmitting orders on behalf of third parties and placing (marketing) crypto-assets to specified purchasers;
- providing transfer services for crypto-assets on behalf of third parties;
- and finally, provision of advice and portfolio management on crypto-assets;
Of course, while these examples and definitions may serve as general guiding points, whether a token or service falls into the scope of MiCA must be examined on a case-by-case basis by reference to the specific characteristic of each asset class and business.
Series of blogs ‘MiCA’
The draft Markets in Crypto-Assets (MiCA) Regulation was released by the European Commission in September 2020. As with most markets-focused regulations, one of MiCA’s priorities is to limit the potential risks to the consumer. But the EC’s proposal also aims to address certain issues that it sees as hindering the EU crypto-asset sector.
Watsonlaw will publish a series of blogs about MiCA over the coming weeks.
The following topics are covered:
MiCA – Introduction to the Markets in Crypto-Assets Regulation
MiCA – Reasons and Objectives
MiCA – Choice of Legislative Instrument and Scope
MiCA – Offering of Crypto-Assets and Admission to Trading
MiCA – Offering and Admission to Trading of Asset-referenced and E-money Tokens
MiCA – Regulation of Crypto-asset Service Providers
MiCA – Market Abuse Prevention under MiCA
If you have any questions about the MiCA, please contact new tech expert Willem-Jan Smits or Camiel Vermeulen. Our cryptoteam has extensive knowledge of the crypto- asset sector and are ready to help you.