2022 was a landmark year for crypto policy and regulatory development.[1] The US Congress debated bipartisan legislative proposals to govern crypto markets,[2] regulators from Singapore to the UK set out rules to protect consumers from fraud and misleading advertising in crypto markets. Additionally, the dramatic collapse of Terra/UST accelerated policy efforts to address risks associated with stablecoins,[3] and the more recent demise of FTX[4] reinvigorated the argument that urgent regulatory intervention is needed to ensure the stability of crypto trading platforms and reduce opportunities for regulatory arbitrage.[5] However, one of the biggest pieces of regulatory news in 2022 was that the EU finalized its sweeping Markets in Crypto-Assets Regulation (MiCA).[6]
After a busy 2022, 2023 is already shaping up to be another year that is filled with tremendous activity, with European regulators and policymakers set to explore new frontiers in the crypto space.[7]
MiCA’s Framework
MiCA is due for a formal vote by the EU Parliament and publication in the first half of 2023, with its provisions expected to come into force before the end of 2024.[8] MiCA will first be translated into all the official languages of the EU and is scheduled to be published in the European Official Journal by the first quarter of 2023.[9]
MiCA is intended to replace current national regulatory frameworks with regard to crypto assets,[10] effectively introducing specific rules concerning stablecoins.[11] MiCA contains 126 articles that primarily concern the offer and marketing of crypto-assets, issues concerning asset-referenced tokens and e-money tokens,[12] the authorization and operating conditions for crypto-service providers assets, the prevention of abuses by those in dominant positions in the crypto-asset market, as well as the roles of the European Securities and Markets Authority and the European Banking Authority.[13] MiCA establishes uniform requirements governing the offering and placing on the market of most[14] crypto-assets, as well as requirements governing Cryptocurrency Asset Service Providers (CASPs).[15] Under MiCA, CASPs in the EU will face extensive compliance requirements, which will enhance transparency minimize the potential for market contagion and reduce risks to users.[16] In addition to a number of other requirements, CASPs will be required to demonstrate their: (1) stability and soundness; (2) ability to safeguard users’ funds; (3) adherence to prudential standards; (4) implementation of controls to ensure they are not engaging in proprietary trading; (5) avoidance of conflicts of interest; and (6) ability to defend against market abuse and manipulation.[17] Additionally, stablecoin issuers will face stringent reserve and disclosure requirements to ensure token holders are protected against bank runs.[18] Because it is incredibly comprehensive, MiCA provides market participants with clear rules and helps them to understand what will be expected from them over the long-term. It is expected that in 2023 a growing number of CASPs will seek to register in Europe to take advantage of one MiCA’s perks, which allows entities registered in one EU member state to “passport” their services around Europe without having to obtain approval from regulators in all twenty-seven member states.[19] This will help to position the EU as a leader in crypto asset innovation.[20]
MiCA provides a clear definition of crypto-assets, which it defines as a “digital representation of value or rights, which can be transferred and stored electronically, using a distributed ledger or similar technology, such as a Blockchain.”[21] MiCA also creates a distinction between crypto-assets and other digital currencies, such as asset-referenced tokens and e-money tokens.[22] Under the regulation, utility tokens are defined as a type of crypto-asset that provides digital access to a good or service, available on Digital Ledger Technology (DLT),[23] and accepted only by the issuer of that token.[24]
MiCA aims to create a dedicated and harmonized framework at Union level, providing specific rules for cryptocurrencies and related activities and services and clarifying the applicable legal framework.[25] In addition, MiCA’s harmonized framework regulates services related to cryptocurrencies that are not yet covered under EU legislation.[26] Harmonization supports innovation and fair competition, while also ensuring a high level of consumer protection and market integrity in cryptocurrency markets.[27] Ultimately, this framework will enable cryptocurrency service providers to scale up their business on a cross-border basis and facilitate their access to banking services, allowing them to conduct their business with ease.[28] A Union framework treats cryptocurrency issuers and crypto-asset service providers equally, thereby providing opportunities for market entry and ongoing and future development.[29]
However, it is also useful to look at what MiCA excludes. Based on the informal negotiations that took place in the second quarter of 2022, it is clear that nonfungible tokens (NFTs) will be excluded.[30] Though NFTs were excluded, the EU Commission has bound itself to carry out a global assessment of the NFTs regulatory frameworkmost likely it will address emerging market risks for digital intellectual property assets.[31]
In recent months, there has been news that a battle in the European Parliament concerning whether MiCA should prohibit the proof-of-work mechanism.[32] Proof-of-work is an energy-intensive method of validating transactions that, for example, take place on the Bitcoin blockchain.[33] This validation mechanism involves the participation of miners and requires high electricity consumption.[34] The primary concern is that the practice contributes to global warming.[35]
Despite strong opposition against proof-of-work, a compromise was reached in the European Parliament.[36] Because proof-of-work is sacred to Bitcoin purists and required for many crypto currencies – including Ethereum – the ban would have had media resonance but would have been difficult to enforce.[37] As such, proof-of-work has not been banned, however, cryptocurrency market participants are required to disclose their approach to environmental and climate issues.[38] The European Securities and Markets Authority has been tasked with developing technical regulatory standards on this issue.[39] Within two years, the European Commission is required to produce a report on the environmental impact of validation mechanisms and release sustainability guidelines that are consistent with the EU’s sustainable finance taxonomy.[40]
Conclusion
MiCA represents the first attempt by a leading global jurisdiction to regulation digital assets and the greater crypto ecosystem.[41] Because MiCA is directly applicable EU law, it will ensure a harmonized regime across member states. MiCA’s impact, however, will likely extend well beyond the EU’s borders. Because MiCA is so comprehensive, it is likely to become a template that many other countries look to when developing their own crypto asset regulatory frameworks.[42]
[1] See Jason Brett, 2022 Year in Review: Crypto Policy Experiences Massive Turbulence in Congress Amid TerraUSD and FTX Failures, Forbes (Dec. 23, 2022), https://www.forbes.com/sites/jasonbrett/2022/12/23/2022-year-in-review-crypto-policy-experiences-massive-turbulence-in-congress-amid-terrausd-and-ftx-failures/?sh=8643baa5777a.
[2] See Thomas Franck, Bipartisan crypto regulatory overhaul would treat most digital assets as commodities under CFTC oversight, CNBC (June 7, 2022), https://www.cnbc.com/2022/06/07/bipartisan-crypto-bill-lummis-and-gillibrand-want-to-empower-cftc-treat-digitals-assets-like-commodities.html.
[3] Stablecoins are a type of digital currency that is anchored to a stable reserve asset such as the US dollar, the Euro or to commodities such as gold, with this peg intended to reduce the volatility of the same. See Alyssa Hertig, What Is a Stablecoin?, CoinDesk (Jan. 19, 2023), https://www.coindesk.com/learn/what-is-a-stablecoin/.
[4] See Mark Hooson & Andrew Michael, Crypto Update: Govt Moots Central Bank Digital Currency In Circulation By 2030, Forbes: Advisor (Feb. 7, 2023, 10:40 AM), https://www.forbes.com/uk/advisor/investing/2023/01/24/cryptocurrency-updates/.
[5] See Crypto 2023 Predictions: MiCA Will be the Blueprint for Regulation Globally, Elliptic Connect (Dec. 14, 2022), https://hub.elliptic.co/analysis/crypto-2023-predictions-mica-will-be-the-blueprint-for-regulation-globally/ [hereinafter Crypto 2023 Predictions].
[6] See Digital finance: agreement reached on European crypto-assets regulation (MiCA), Consilium Europa (June 30, 2022), https://www.consilium.europa.eu/en/press/press-releases/2022/06/30/digital-finance-agreement-reached-on-european-crypto-assets-regulation-mica/ [hereinafter MiCA Agreement]; Markets in crypto-assets (MiCA), European Parliament: Think Tank (Nov. 29, 2022), https://www.europarl.europa.eu/thinktank/en/document/EPRS_BRI(2022)739221.
[7] See generally David Carlisle, Elliptic Regulatory Outlook Report 2023 (2022).
[8] See Crypto 2023 Predictions, supra note 5.
[9] See Amitoj Singh, European Union Postpones MiCA Vote to April, CoinDesk (Jan. 17, 2023), https://www.coindesk.com/policy/2023/01/17/european-union-postpones-mica-vote-to-april/.
[10] See Aditya Narain & Marina Moretti, Regulating Crypto, Int’l Monetary Fund (Sept. 2022), https://www.imf.org/en/Publications/fandd/issues/2022/ 09/Regulating-crypto-Narain-Moretti.
[11] See Azad Ali & Pietro Piazzi, EU’s Proposed Legislation Regulating Cryptoassets, MiCA, Heralds New Era of Regulatory Scrutiny, Skadden, Arps, Slate, Meagher & Flom LLP (Nov. 23, 2022), https://www.skadden.com/insights/publications/2022/11/eus-proposed-legislation.
[12] See Stefan Berger, REPORT on the proposal for a regulation of the European Parliament and of the Council on markets in crypto-assets and amending Directive (EU) 2019/1937, Eur. Parliament (Mar. 3. 2022), https://www.europarl.europa.eu/doceo/document/A-9-2022-0052_EN.html.
[13] See MiCA Agreement, supra note 6.
[14] MiCA’s regulation does not extend to e-money tokens and money tokens. See Issam Hallak, Markets in crypto-assets (MiCA), Eur. Parliament (Nov. 2022), https://www.europarl.europa.eu/RegData/etudes/BRIE/2022/739221/EPRS_BRI(2022)739221_EN.pdf.
[15] See Werner Vermaak, MiCA (Updated July 2022): A Guide to the EU’s Proposed Markets in Crypto-Assets Regulation (July 2022), https://www.sygna.io/blog/what-is-mica-markets-in-crypto-assets-eu-regulation-guide/.
[16] See Hallak, supra note 14.
[17] See id.
[18] See id.
[19] See id.
[20] See Kelvin Chan, Crypto rules to make Europe a global leader as prices plunge, AP News (June 30, 2022), https://apnews.com/article/cryptocurrency-technology-european-union-5bf12e63324d3a557b63110a9fb85177.
[21] See Kai Zhang et al., MICA – Overview of the New EU Crypto-Asset Regulatory Framework (part 1), K&L Gates (Nov. 15, 2022), https://www.klgates.com/MiCA-Overview-of-the-new-EU-crypto-asset-regulatory-framework-Part-1-11-15-2022.
[22] See generally Oliver Read & Carolin Diefenbach, The Path to the EU Regulation Markets in Crypto- assets (MiCA)(RheinMain Univ. of Applied Scis., Wiesbaden Inst. of Fin. & Ins., Working Paper, No. 13/2022), https://www.econstor.eu/bitstream/10419/266233/1/wifin-wp13.pdf
[23] Blockchain is an example of DLT. See What is Blockchain, r3, https://www.r3.com/blockchain-101/ (last visited Feb. 4, 2022, 12:00 PM).
[24] See Crypto Assets and Cryptocurrency, Fin. & Consumer Servs. Comm’n, https://www.fcnb.ca/en/investing/high-risk-investments/crypto-assets-and-cryptocurrency (last visited Feb. 4, 2022, 12:01 PM).
[25] See generally Read & Diefenbach, supra note 22.
[26] See generally Tomasz Tomczak, Crypto-assets and crypto-assets’ subcategories under MiCA Regulation, 17 Cap. Mkts. L. J. 365 (2022).
[27] See Ryan Browne, EU agrees on landmark regulation to clean up crypto ‘Wild West’, CNBC (June 30, 2022), https://www.cnbc.com/2022/06/30/eu-agrees-to-deal-on-landmark-mica-cryptocurrency-regulation.html.
[28] See generally Read & Diefenbach, supra note 22.
[29] See id.
[30] See Fredrik Svensson & Tobias Björklund, The upcoming EU Crypto Asset Regulation (MiCA)– are NFTs to be regulated like crypto?, Setterwalls (Oct. 12, 2022), https://setterwalls.se/en/article/the-upcoming-eu-crypto-asset-regulation-mica-are-nfts-to-be-regulated-like-crypto/.
[31] See Patrick Goebel et al., Countdown to MiCA: The EU’s cryptoassets regulation, Dechert LLP (July 15, 2022), https://www.jdsupra.com/legalnews/countdown-to-mica-the-eu-s-cryptoassets-7919247/.
[32] See MICA Regulation: The EU Parliament’s Position on ‘Proof-of-Work’ Mechanism, Greenberg Traurig LLP (July 15, 2022), https://www.gtlaw.com/en/insights/2022/7/mica-regulation-the-eu-parliaments-position-on-proof-of-work-mechanism.
[33] See Proof-of-stake vs. proof-of-work: Pros, cons, and differences explained, Cointelegraph, https://cointelegraph.com/blockchain-for-beginners/proof-of-stake-vs-proof-of-work:-differences-explained (last visited Feb. 4, 2022, 12:09 PM).
[34] See id.
[35] See The Environmental Impacts of Cryptomining, Earthjustice (Sept. 1, 2022), https://earthjustice.org/features/cryptocurrency-mining-environmental-impacts.
[36] See Sandali Handagama, Proposal Limiting Proof-of-Work Is Rejected in EU Parliament Committee Vote, CoinDesk: Policy (Mar. 14, 2022), https://www.coindesk.com/policy/2022/03/14/proposal-limiting-proof-of-work-is-rejected-in-eu-parliament-committee-vote-sources/.
[37] See id.
[38] See Andres Carney, What EU’s MiCA regulation means for crypto-asset service providers, Pinsent Masons (Oct. 28, 2022), https://www.pinsentmasons.com/out-law/analysis/eu-mica-regulation-crypto-asset-service-providers.
[39] See id.
[40] See EU taxonomy for sustainable activities, Eur. Com’n: Fin., https://finance.ec.europa.eu/sustainable-finance/tools-and-standards/eu-taxonomy-sustainable-activities_en (last visited Feb. 4, 2022, 12:16 PM).
[41] See Marc Foster, EU Policy Update: MiCA Endorsement to Have Global Impact, Crypto Council for Innovation (Oct. 13, 2022), https://cryptoforinnovation.org/eu-policy-update-mica-endorsement-to-have-global-impact/.
[42] See Zhang et al., supra note 21.
