The rationale behind unique regulatory framework for crypto-assets within the EU
It is a fact for a period of time that Europe lags behind North America and Asia when it comes to inovation and technology progress. The situation is not much different in the crypto industry. It was precisely one of the reasons, why there was a strong sense of urge to do something. The EU responded with the most comprehensive, thorough and defined regulatory crypto framework on the market – Market in Crypto Assets Regulation (MiCA).
The European Council published the agreed text for MiCA on the October 5 2022. Just to mention that this is the second version of the MiCA. First was published back to the September 2020 as a part of Digital Finance package with the aim to position Europe as the leader in terms of digital economy. MiCA is expected to be ratified in Q1 of 2023. Firms in scope will then have 12 or 18 months before they need to comply with the requirements of the MiCA. But first, how we came to this moment?
Why MiCA is necessary if EU wants to catch up with USA and Asia
It is well known that the essence of the European Union (EU) is a single market meaning the free market for the trade of goods, services, capital and labour. The single market implies the similar regulatory framework, more or less. If we take for example banking industry which is a crucial industry in any economy, we can see that there is a regulatory framework in the EU level allowing any bank to do the business in the territory of the entire EU with certain dose of legal predictability.
On the other hand, if we take a look at the crypto-assets industry we can clearly see that is not the case. Namely, in the following part of this article, we will see the opinion from the European Commision taken over from the Explanatory Memorandum from the proposal of the MiCA regarding the need for establishing the single crypto-assets regulatory framework within the territory of the EU.
Today, crypto-asset issuers and crypto-asset service providers (CASP) cannot fully take advantage of single market, due to the lack of legal certainty about the regulatory treatment of crypto-assets as well as the absence of a dedicated and coherent regulatory and supervisory regime at EU level. While a few Member States have already implemented a bespoke regime to cover some CASP or parts of their activity, in most Member States they still operate outside any regulatory regime. In addition, an increasing number of Member States are considering bespoke national frameworks to cater specifically for crypto-assets and CASP. It is interesting to mention that there are very few countries with a comprehensive crypto-asset regulation. One of them is Serbia. Another practical implication arising from unclear regulatory framework is that banks do not fully recognize CASP as a standard market participants and that they are not willing to treat them with a greater level of understanding.
The divergent frameworks, rules and interpretations of crypto-assets and crypto-asset services throughout the EU disablethe CASP’ ability to scale up their activity at EU level. This means that CASP are forced to familiarise with several Member States’ legislations, obtain multiple national authorisations or registrations and comply with often divergent national laws, often adjusting their business model throughout the EU. This results in high costs, legal complexity and uncertainty for CASP limiting the development and scaling up of crypto-asset activities in the EU. Additionally, the lack of applicable regimes to CASP in many Member States limits the availability of funding and sometimes even wider access to necessary financial services, such as banking services, due to the regulatory uncertainty associated with crypto-assets and therefore CASP.
These divergences also create an uneven playing field for CASP depending on their location, creating further barriers to the smooth functioning of the internal market. Finally, this adds to the lack of legal certainty, which, combined with the absence of a common EU framework, leaves consumers and investors exposed to substantial risks.
Solution – EU uniform legal framework
European Commision concludes that through the introduction of MiCA, uniform conditions of doing business for firms within the EU can be set, overcoming the differences in national frameworks, which is leading to market fragmentation while reducing the complexity and costs for firms operating in this space. At the same time, it will offer firms full access to the single market and provide the legal certainty necessary to promote innovation within the crypto-asset market. Lastly, it will cater for market integrity and provide consumers and investors with appropriate levels of protection and a clear understanding of their rights as well as ensuring financial stability.
Another issue is that different approaches taken by Member States make crypto-assets cross-border provision of services difficult. Proliferation of national approaches also poses risks to level playing field in the single market in terms of consumer and investor protection, market integrity and competition. Furthermore, while some risks are mitigated in the Member States that have introduced bespoke regimes on crypto-assets, consumers, investors and market participants in other Member States remain unprotected against some of the most significant risks posed by crypto-assets (e.g. fraud, cyber-attacks, market manipulation).
European Commision points that an action at EU level, such as MiCA proposal is expected to create an environment in which a larger international market for crypto-assets and CASP could develop, thereby reaping the full benefits of the single market. An EU framework would significantly reduce the complexity as well as the financial and administrative burdens for all stakeholders, such as CASP, issuers, consumers and investors. Harmonising operational requirements for CASP as well as the disclosure requirements imposed on issuers could also bring clear benefits in terms of consumer and investor protection and financial stability.
Due to the abovementioned reasons, MiCA proposal establishes harmonised requirements for issuers that seek to offer their crypto-assets across the EU as well as CASP wishing to apply for an authorisation to provide their services in the single market. MiCA explicitly states that issuers and CASP must not be subject to specific national rules. Therefore, a legal form of Regulation is more appropriate than a legal form of Directive.
When it comes to the opinion of the market participants, most of them stated that the creation of a bespoke regime for crypto-assets not currently covered by the EU financial services legislation, would be beneficial for the establishment of a sustainable crypto-asset ecosystem in the EU. They also said that given the fact that there is still no unique regulatory framework in the USA, there is a real sense in the industry that Europe can still be positioned as a global crypto-asset leader due to the most progressive and favorable crypto legal framework.
In addition, the majority of respondents confirmed that there is a need for legal certainty and harmonisation across national legislations, and many stakeholders were in favour of the bulk of the exemplified requirements that could be set for CASP. They also highlighted the need to avoid regulatory arbitrage, avoid circumvention of rules by crypto-asset issuers, and to ensure that all relevant rules from existing legislation on payments and e-money is also present in a bespoke regime.
That would be it for the first article covering MiCA. In the following articles we will be covering other important parts of MiCA, as well as other regulatory frameworks regarding crypto-assets. Stay tuned and do not hesitate to contact us in case of any legal questions.
Token Specialist & Legal Officer