The final text of the Markets in Crypto Assets (MiCA) law creating a broad legal framework for digital assets including cryptocurrencies and stablecoins has been passed by the European Commission, and goes to the European Parliament next week.
The document, released Wednesday (Oct. 5), features a number of key provisions, notably capping the use of non-euro-denominated stablecoins — a provision that appeared to have been dropped in draft late last month. It has been revived in this text, but the EP is not bound by this draft.
Broadly, it divides cryptocurrencies into three categories: stablecoins, which are called e-money; asset-referenced tokens, which are stablecoins backed by assets other than fiat, including algorithmic stablecoins like the TerraUSD that collapsed in a $48 billion run in May; and everything else.
The European Banking Authority (EBA) will oversee e-money stablecoins, while much of the rest will be overseen by the European Securities and Markets Authority (ESMA).
Neither decentralized finance nor crypto lending and borrowing are covered in the MiCA law.
While there are a number of controversial sections broadly opposed by the crypto industry, such as limiting stablecoin transactions and applying the Travel Rule’s know your customer (KYC) requirements to any transaction between hosted wallets — such exchange wallets — or from a hosted wallet to an unhosted one, it remains “a momentous development for the cryptocurrency space,” Anto Paroian, CEO and executive director of crypto hedge fund ARK36, said in an email.
It should, he added, be “seen largely in a positive light” and as an “inflection point.”
As the first “comprehensive attempt at regulating the crypto markets,” Paroian said MiCA “marks the moment when cryptocurrencies and other digital assets have received full legal recognition in one of the largest and most important jurisdictions of the world.”
This should, he said, send “a powerful message to regulators in other places — as well as to investors who may have previously been hesitant to interact with this space.”
See also: UK Government Eyes Crypto Opportunity With ‘Agile’ Legislation
Defined by Risk
According to the EC draft, the MiCA law “introduces three sub-categories of crypto-assets that should be distinguished and subject to different requirements depending on the risks they entail.”
The first is defined as “electronic money tokens” or “e-money tokens” and “consists of crypto-assets that aim at stabilizing their value by referencing only one official currency.” Per the draft, these assets are “very similar to the function of electronic money” in that they “are electronic surrogates for coins and banknotes and are likely to be used for making payments.”
The second are “asset-referenced tokens” or ARTs, which maintain their stable value by “referencing to any other value or right, or combination thereof, including one or several official currencies.”
The third category includes everything else, including utility tokens that cover the vast majority of cryptocurrencies other than currency-replacement tokens like bitcoin and litecoin.
ARTs are limited in some very key ways, as “large-scale, significant” ARTs “pose greater risks to financial stability than other crypto-assets and asset-referenced tokens with more limited issuance.”
As such, they are subject to more stringent requirements. These include higher capital requirements, interoperability requirements and the mandatory establishment of a liquidity management policy.
Related: EU Lawmakers Target DeFi, NFT Money Laundering in New Bill
Issuers of ARTs that are too widely used within the eurozone will be required “to reduce the level of activity” if there are more than 1 million transactions per day, or those transactions reach a value of €200 million.
As ARTs “pose threats to monetary sovereignty,” the MiCA law will also allow national central banks to order their withdrawal, impose other limits on the amount that can be used or require a minimum denomination.
However, these regulations do not override “national legislation regulating the use of domestic and foreign currencies in operations between residents.”
As for e-money tokens, issuers will be required to redeem them for fiat currency on-demand and at par in the currency in which they are denominated. Issuers will not be allowed to “grant interests to holders of e-money tokens for the time such holders are holdings those e-money tokens.”
Loyalty Points, NFTs Excluded
The EC draft on MiCA specifically excludes digital assets that cannot be transferred to others or are only redeemable from the issuer directly — specifically including loyalty points — from the regulations.
As far as non-fungible tokens (NFTs) are concerned, the draft says it “should not apply to crypto-assets that are unique and not fungible with other crypto-assets, including digital art and collectibles, whose value is attributable to each crypto-asset’s unique characteristics and the utility it gives to the token holder.”
Nor does it “apply to crypto-assets representing services or physical assets that are unique and not fungible, such as product guarantees or real estate.”
However, it also says that the “fractional parts of a unique and non-fungible crypto-asset should not be considered unique and not fungible” so the “issuance of crypto-assets as non-fungible tokens in a large series or collection should be considered as an indicator of their fungibility,” adding that simply issuing each one a unique ID number or code is not sufficient to make them non-fungible.
Rather, the “assets or rights represented” must also be unique and non-fungible to be excluded from the regulations.
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