[INTERVIEW] The EU Proposal for a Regulation on Crypto-assets ‘MiCA’: 3 questions to Stéphane Blemus

The EU institutions are finalising their trilogue discussions on a major legislative text for European digital markets: the EU Proposal for a Regulation on ‘Markets in Crypto-assets’ (better known as the ‘MiCA’ Regulation). Stéphane Blemus agreed to answer questions from Sciences Po’s Digital, Governance & Sovereignty Chair.

What are the objectives of the adoption of the MiCA Regulation?

Several EU Member States have already implemented national regulations dedicated to crypto-assets, these new types of assets issued on distributed ledgers (or ‘blockchains’). In 2019, France adopted the ‘PACTE’ law, enacting a regulatory framework for public offerings of tokens on distributed ledgers and the activities of digital asset service providers (‘DASP’). In parallel, a new licensing regime was created in Germany in 2020, which is specific to the crypto-asset custody service. The main limitations of these various national laws are related to their field of application, which is confined to the territory of the relevant country; to regulatory fragmentation within the European Union; and to the absence of a European ‘passporting’ process for the provision of regulated services on crypto-assets across the EU countries.

Since 2019, the European institutions have identified the need to establish common standards at EU level. In that respect, the MiCA Regulation is a major pillar of the EU’s digital finance strategy, unveiled by the European Commission in September 2020.

What are the main provisions of the MiCA Regulation?

The MiCA Regulation will create a new harmonised legal framework at EU level for many types of crypto-assets that are not already covered by EU law (i.e. those that do not qualify as financial instruments, electronic money, deposits, structured deposits or securitisation under existing law).

The main components of the MiCA Regulation are the following:

• A taxonomy of definitions of different types of crypto-assets (including utility tokens and certain types of ‘stablecoins’);
• A legal regime dedicated to the public offering of various types of crypto-assets (with the exception of financial or monetary assets already covered by EU law);
• An authorisation process specific to public offerings of ‘stablecoins’ (i.e. crypto-assets whose function is to maintain a stable value) referencing one or several other assets;
• A legal regime specific to a new type of regulated entities: crypto-asset service providers (‘CASP’).

For public offerings of crypto-assets in the EU, the main contribution of the MiCA Regulation is to provide for a mandatory, harmonised and uniform authorisation regime throughout the European Union. The adoption of MiCA by means of a regulation and not a directive, unlike other EU financial regulations in the past (for payment services, e-money, etc.), makes it possible to minimise the risks of ‘forum shopping’ between the European Union member states and to facilitate the emergence of major regional players.

For service providers willing to provide certain types of services related to crypto-assets in the EU (placing, custody, exchange, etc.), the MiCA Regulation should provide legal certainty, allowing them to better define their business offer, strengthen their relationships with EU regulators and potentially facilitate their discussions with various economic partners (payment institutions, banks, insurers, brokers, asset managers, institutional investors, etc.).

What are the main issues still under debate around the MiCA Regulation?

The MiCA Regulation seeks to combine innovation (technological, entrepreneurial, financial) with protection (of investors, market integrity, and financial stability). Defining such a balanced and pragmatic approach in this Regulation is as essential as it is difficult.

Although this Regulation potentially represents a leap forward for the creation (and strengthening) of major players in the European crypto-asset markets, real challenges have emerged and will have to be clarified through the ‘trilogue’ of EU institutions (EU Commission, Council and Parliament).

• The regulation of ‘stablecoins’ referencing other assets: the discussions on the subject have been tainted by the implications of the (posthumous) ‘Libra/Diem’ consortium project led by Facebook (now Meta). It appears necessary to regulate the particular risks to financial stability, investor protection and monetary sovereignty linked to these assets used to stabilize the exchange of value on crypto-asset markets, but the EU cannot restrict itself to a purely defensive approach. The European Central Bank and the national central banks have already produced various in-depth experiments and analyses on a potential ‘digital euro’, and the EU private sector is assessing the feasibility of future payment services based on central bank digital currencies (CBDCs) and different types of ‘stablecoins’ (e-money tokens, commercial bank money in tokenised form, ‘algorithmic stablecoins’, etc.). A global strategic vision has to be drafted at EU level to bring together these analyses without clichés, foster cooperation between public, private and academic institutions, and establish guidelines for future digital payment service offerings in France and in the EU.

• The regulation of ‘NFTs’ (‘Non-fungible tokens’): The sudden trend for NFT markets has challenged European public institutions, creating a risk that they regulate these new markets too quickly and ineffectively by essentialising them in a catch-all category. Many market players and associations in the French blockchain ecosystem (Ledger, Coinhouse, ADAN market association, etc.) have criticised the EU Parliament’s proposal to include ‘NFTs’ within MiCA’s scope of application. These proposals seem to imply in particular the assimilation of various types of ‘NFTs’ to financial instruments (recital number 8a of the compromise text adopted by the European Parliament). These industry stakeholders have pointed out that certain criteria seem to diverge from the EU ‘MiFID’ securities regulation currently in force. They also note that any ‘NFT’ that can be exchanged without the prior consent of its issuer is already included in the scope of the MiCA Regulation. In order to understand these new digital assets, it is important to favour substance over form and to align the regulatory regime as much as possible with the regimes applying to their respective underlying assets, which are extremely diverse. The EU Council and Commission seem to oppose the inclusion of ‘NFTs’ (and decentralised finance, or ‘DeFi’, more generally) in the MiCA Regulation’s scope of application. Nevertheless, it is possible that crypto-asset service providers may be subject to new regulatory requirements for NFT-based services.

• Technological neutrality: The compromise text that was submitted to the European Parliament on March 14 2022 proposed a de facto ban on blockchain protocols using the validation system known as ‘Proof-of-Work’, which is for example the case for Bitcoin. The proposal required that an environmental sustainability deployment plan be put in place for crypto-assets issued, offered or admitted to trading in the EU before or after the entry into force of the MiCA Regulation. This requirement would have been impossible for certain types of blockchains, starting with the Bitcoin protocol, which operates in an automated manner without a control authority. If adopted in the MiCA Regulation, this proposal would effectively have banned any regulated Bitcoin-related service within the EU. That would have gone too far. In the end, this proposal was not adopted by the EU Parliament, but was replaced by references to the compliance of crypto-asset mining with the EU sustainable finance taxonomy. Given that the EU sustainable finance taxonomy was not created for that purpose, the trilogue discussions may replace these references with strengthened requirements to investors on sustainability matters in public offerings for crypto-assets. Distributed ledger technologies are still relatively immature. It is still impossible to identify the technology(ies) that will become the standards of tomorrow, or to predict the evolution of ‘blockchain’ protocols. Prohibiting or limiting the use of a technology or a mode of technological validation (in particular ‘Proof-of-Work’) cannot seriously be envisaged at the present time by EU institutions. When it comes to the choice between technologies (‘Proof-of-Work’, ‘Proof-of-Stake’, etc.) or business models (‘Decentralised Autonomous Organization’, ‘Decentralised Finance’), European regulators must adopt an iterative approach, which makes it possible to experiment and study the impacts of new technologies while minimising risks for citizens and businesses.

For these many reasons, the work of the informal ‘trilogue’ meetings in Q2-Q3 2022, during which the final text of the MiCA Regulation will be agreed, will be crucial. The timeframe for a political agreement on a final text by EU institutions is still unclear, yet French public institutions – notably the Treasury – are doing their best to finalise it by the end of the French EU Council presidency EU – i.e. the end of June 2022. The digital asset industry is now at a crossroads in Europe, and the MiCA Regulation may or may not be the lever of their ambitions.

Stéphane Blemus is Secretary-General of Société Générale-Forge, doctor of law from the Paris 1 Sorbonne University, and postdoctoral researcher at the Faculty of Law of the University of Copenhagen (Denmark).