Ahead of the announcement of a new MiCA and PRR-centered event series, INATBA is releasing its policy position on the two proposed regulations from the European Commission. These positions contain insights from INATBA’s 170+ members.
The International Association for Trusted Blockchain Application (INATBA) welcomes the European Commission’s proposal for Markets in Crypto Assets (MiCA) Regulation; we have been actively engaging our 170-member base to assess the impact of the proposed requirements and offer feedback. Our members are supportive of the Commission’s objectives to provide legal certainty, promote innovation and establish Europe as the global leader in distributed ledger technology (DLT). We concur with the choice of a Regulation to fulfill these objectives.
Legal clarity and measured approach are necessary for the sustainable growth of crypto-asset markets and progress of innovative DLT technologies. To this end, we point to five important issues in need of further development:
Issue#1: The proposed definitions of certain crypto-assets are broad and challenging to apply consistently across EU Member States.
- The terms ‘crypto assets’ and ‘utility tokens’ are considered too broad and may unintentionally bring into scope projects and products which are not intended to be used for investment or finance purposes.
- As MiCA only applies to crypto-assets that are not financial instruments and the lack of consistent EU-wide definitions of financial instruments under MiFID II can lead to inconsistent categorisation 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.
- Derivatives based on crypto-assets are one key area where such inconsistency can occur. In cases where a derivative product references underlying assets which are settled in crypto-assets rather than in fiat currency, it is unclear whether the instrument would be a financial instrument or a crypto-asset across all EU member states.
- Where such a derivative is deemed a financial instrument, it is further unclear why an asset-referenced token (ART), which seeks to maintain a stable value by referencing crypto asset(s) is a MiCA instrument, but a derivative based on projected future value of a crypto asset(s) is not.
- Amendment of the definitions to become activity-based to focus on the purpose that such a token serves (e.g. investment) can lead to a more consistent application of the Regulation across Member States will be ensured through primary legislation, achieving the objective of a harmonized EU approach.
- The definition of an ‘asset-referenced token’ should be expanded to also include all tokens whose value is based on other crypto-assets, regardless of whether they feature a stabilisation mechanism or not. As a consequence, a more consistent application of the Regulation across Member States will be ensured through primary legislation, achieving the objective of a harmonized EU approach.
Issue #2: The requirement to register as a legal entity will be problematic for certain decentralised projects such as distributed finance (DeFi).
- Articles 4 (Crypto Assets), 15(ART), 43 (e-money) and 53 (CASP) that require the establishment of a legal entity can pose an existential challenge for DeFi projects, and permission-less projects generally, as many are not capable through their very architecture of establishing legal entities.
- DeFi projects organise and incentivise their contributors through the unique features of blockchain technology. Historically, their participants have not required to be brought under a legal entity structure because the encoded rules and business processes at the heart of the technology already ensures that rights and obligations are respected.
- To comply with the legal entity requirement, DeFi projects will have to re-organise and in the process, many may cease to exist. As such, the requirement runs contrary to the Commission’s objective of supporting DLT-based innovation.
- This will make Europe less attractive as a destination for such innovative projects who will likely choose more receptive geographies such as Asia Pacific.
- Issuers exempt from white paper-related requirements should also be exempt from the requirement to set up a legal entity.
- Leverage the potential of the technology to build in governance, adherence to regulations, oversight and auditing into the architecture of projects. This approach prevents bad behaviours and means the enforcement of regulations moves from being behind events to in front of events
- Provide guidance on how decentralised projects might use alternative governance structures such as the establishment of foundations to represent projects.
Issue #3: Uneven Playing Field. Exempting credit institutions from seeking authorisation under MiCA will distort the level playing field between incumbent and new service providers, and potentially result in consumer risk.
- Entities authorised under Directive 2013/36/EU as credit institutions who wish to issue ARTs or be crypto-asset service providers (CASPs) do not need to secure an additional authorisation under MiCA. As such, they do not need to demonstrate that their operations, products and management team are fit-for-purpose in crypto-asset markets.
- 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.
- Additionally, CASP aims to limit the technical risk associated with crypto assets. Credit institutions face the same technical risks as CASP and authorization processes will help limit such a risk to the general consumer who will count on credit institutions crypto-assets offerings.
- Credit institutions should not be subject to exemption from requirements related to the issuance of ARTs or provision of crypto asset services & technical requirements should be maintained for credit institutions
Issue #4: Transitional arrangements penalise issuers of e-money and asset-referenced tokens.
- The transitional arrangement that issuers of crypto-assets already offered in the EU will not be subject to MiCA does not extend to ARTs or e-money tokens.
- We believe the absence of appropriate transitional measures for such issuers is unsatisfactory and disproportionate.
- This will result in issuers of such tokens having to pause such issuance from the date of MiCA coming into force until national competent authorities are able to authorise issuers and approve whitepapers.
- Suitable transitional arrangements should be provided for ARTs or e-money tokens.
Issue #5: Upholding ‘same risk, same rules’ and technology neutrality principles
- MiCA restricts the capital raise for projects using DLT/blockchain technologies to a ceiling of €1m within 12 months.
- This places such projects not choosing blockchain technologies at an advantage as under Prospectus Rules they are able to raise up to €8m within a 12 months
- Align both requirements in MiCA and Prospectus Regulations to fall in line with ‘the same risk same rules’ principle and ensure MiCA satisfies the objective of technology neutrality.
Read more about our work on MiCA and development of our MiCA policy position here.