There was a time, many years ago, when a café in Shoreditch, London, accepted Bitcoin as a form of payment for its coffee and pastries. At the time, it was met with bemusement as the majority of consumers wondered what ‘Bitcoin’ was and assumed it was a mere quirk relevant to a tiny establishment. Fast forward to 2021 and advertisements for mobile applications encouraging the everyday person to invest in cryptocurrencies now flank underground stations and bus stops. The term cryptocurrency has entered our everyday parlance to such an extent that it seems almost unmissable when reading the news. The issue facing governments is, of course, regulation. How does one begin to regulate a market which is relatively ‘new’, highly susceptible to volatility and appears to change almost every month?
In September 2020, the European Commission published its new Digital Finance Strategy. A key fact of that document was the draft Regulation on Markets in Crypto-Assets (MiCA) which was designed to provide a comprehensive regulatory framework for digital assets in the EU. The draft Regulation is currently going through its first readings in the Council and European Parliament, though there is little to no doubt that the regulation will indeed form part of the Digital Finance Strategy. It is therefore likely to have an undeniable effect on the operation of the crypto market in the EU.
The 168-page document is the EU’s response to the policy debate prompted by the Libra proposal in June 2019. In it, the Commission has proposed bespoke regulation for utility tokens and stablecoins including payments tokens, asset-backed tokens and ‘significant’ stablecoins. Stablecoins are a type of cryptocurrency whose value is tied to an outside asset, such as the USD or gold which in turn stabilises its price. It was created as a way of overcoming the volatility associated with other cryptocurrencies such as Bitcoin or Ethereum. Notably, however, the regulation does not apply to blockchain or distributed ledger technologies. It is also not applicable to digital currencies issued by countries and regulated by central banks. Whilst the legislation is wide reaching and ambitious in its regulatory plans (which are outlined here (https://www.law.ox.ac.uk/business-law-blog/blog/2020/11/markets-crypto-assets-regulation-mica-and-eu-digital-finance-strategy), it will not be able to regulate the most used cryptocurrencies which are also the most popular as a result of their potential high yield. Broadly, MiCA seeks to regulate crypto issuers by:
- Placing an information obligation on them to publish a white paper on their products which must be submitted to the relevant financial supervisory authority; and
- Requiring crypto-asset custodians and operators of trading venues to have a registered office in a Member State if they wish to market and sell their products and services in the European Union.
Economists have thus far commentated on the fact that for smaller companies and fintechs, MiCA could create a competitive disadvantage due to the high costs associated with complying with the aforementioned information and registration requirements. Many, however, welcome the proposed regulation, noting that the market thus far has existed broadly unregulated with substantial capacity for abuse alongside potential.
On 19 February 2021, the European Central Bank (ECB) issued its opinion on the draft regulation (https://www.blockchainwg.eu/wp-content/uploads/2021/03/ECB-Opinion-on-MiCA.pdf). Broadly, the ECB is in support of the key objectives outlined in MiCA; however, it has suggested several amendments. In particular, the ECB did not agree with a specific provision relating to the supervision of asset-referred tokens because there would be existing intersections with other EU regulations already applicable to financial services. The ECB further wished to clarify what their role would be in the supervisory process. Considering the role of the institution, it seems clear that the final version of MiCA will address the opinions expressed in the opinion paper.
Whilst MiCA will create entirely new regulations in some Member States, in others, such as Germany, it will have a marginal effect. The German ‘Act Implementing the Amending Directive on the Fourth EU Anti-Money Laundering Directive’ made it one of the first countries in the world to enable financial institutions to define cryptoassets as a type of financial service. This, in turn, incorporated it into German Banking Act. As with all EU Regulations, implementation can be a thorny process depending on each country’s government and governance structure. It will, therefore, be interesting to see how different Member States, particularly those with smaller companies and fintechs, react to MiCA.
Ultimately, as the crypto market continues to evolve, MiCA will hopefully provide some clarity to Member States and companies alike as to what their duties, obligations and expectations are. Nonetheless, when dealing with a market that was designed to be unregulated, created as a form of protest against normative currency and trading, trying to create rules and restrictions will no doubt be a turbulent process both in policy design and implementation.