The proposed Regulation on markets in crypto-assets (MiCA), part of the European Commission's Digital Finance Strategy, aims to create an EU regulatory framework for issuance, offering, intermediation and dealing in crypto-assets including licensing and conduct of business requirements as well as a market abuse regime with respect to crypto-assets. For more details, see our post here.
Late 2021 and in March 2022 the Council of the EU and the European Parliament (EP) respectively adopted their mandates for trialogue negotiations on MiCA. Although some of the EP's high-profile negotiating positions such as the unsuccessful vote on a ban of proof-of-work consensus mechanism (POW) for mining crypto-assets have been widely reported, there are some amendments to the original proposal brought forward by the Council and the EP which are worth examining in more detail to start preparing for the resulting legislation.
NFTs are out of scope
The EP and the Council both proposed changes aimed at excluding Non-Fungible Tokens (NFTs) from the scope of MiCA. This is a welcome policy approach, although the EP seems to take a restrictive view on the scope of the exclusion. To be excluded, NFTs must not be fractionable or grant rights linked to those of financial instruments and must be accepted only by the issuer. This would not necessarily exempt collectibles and other NFTs where there is a secondary market. Conversely, the Council seems to be clear that digital art and collectibles, whose value is attributable to each crypto-asset’s unique characteristics and the utility it gives to the token holder, should be out of scope.
No ban on Proof-of-Work
The EP recognised the environmental impact and high carbon footprint of crypto-currencies, particularly in relation to POW mechanisms used to validate transactions. However, instead of banning crypto-assets mined via POW, the EP reduced its amendment so that by 1 January 2025 crypto-asset mining activities that contribute substantially to climate change mitigation shall be included in the EU Sustainable Finance Taxonomy. An investment in such crypto-assets will be considered as a "green" investment contributing to achieving a climate neutral economy.
Client own account exclusive initiative (OEI) exemption
The EP's proposal to include an OEI exemption from the crypto-asset service provider (CASP) authorisation requirement for third-country firms providing crypto-asset services to clients established or situated in the EU, where such clients have initiated at their own exclusive initiative the provision of a crypto-asset service, is a welcome amendment for third-country firms. Such firms should however bear in mind that client solicitation or the inclusion of clauses, disclaimers or pop-up boxes where the client acknowledges that a service is provided on an OEI basis would preclude them from relying on the OEI exemption. This will limit the current wide-spread industry approach.
Authorisation requirement for offerors of crypto-assets
While both the EP and the Council have proposed amendments relating to offerors of crypto-assets other than asset-referenced tokens or e-money tokens, the EP's proposal also includes an authorisation requirement for such offerors, who shall be established or resident in the EU. If introduced, this requirement would restrict crypto-assets offers and issuances. As an example, blockchain events where legal persons market directly or indirectly crypto-assets could potentially be seen as an offer to the public of crypto-assets.
Internal know-your-customer policies for CASPs were also proposed by the EP. This addition could be popular with the Commission and the Council to combat money laundering and criminal activities, particularly in light of the international sanctions in the context of the Russian/Ukraine crisis.
Consumer protection as the core focus of the Council's position
The Council proposed numerous additional requirements to protect users of crypto-asset services. These protections include additional requirements for CASPs to monitor and disclose conflicts of interest, and a requirement that issuers of asset-referenced tokens maintain a recovery plan providing for measures to be taken by the issuer to restore the compliance with the requirements applicable to the reserve of assets. The Council also proposed that the EBA creates a permanent internal crypto-assets committee for preparing and reviewing decisions relating to MiCA and suggested that ESMA and EBA develop guidelines to classify crypto-assets. Together with other proposed amendments, this would constitute a partial shift of regulatory authority from national to EU level.
Many of the above amendments proposed by the Council and the EP are sensible, although the extent to which they will form part of the finally adopted version of MiCA depends on the further discussions. The MiCA draft is now undergoing the trialogue negotiations between Commission, Council and Parliament. Should a common position be reached, the final version of MiCA will apply, except for certain provisions, 18 months after the date of entry into force, noting that the Council proposed to increase this period to 24 months.