the unpleasant surprises that could further hinder the European crypto ecosystem

Putting the MiCA Regulations in Context

For several years now, there has been a proposal for a regulation from the European Commission for the crypto asset market and their service providers: Mica (Markets in crypto assets).

👉 Here is a summary of the agreements made by MiCA (as of June 29, 2022)

As the MiCA Regulation was the subject of a provisional agreement on June 30, 2022, the relevant European institutions are continuing technical discussions to prepare the final version of the text.

Last week, a preliminary version of the compromise text has been leaked. As’Adam (Association for the Development of Digital Assets) indicates that the final version is not expected for a few weeks.

Unfortunately, in this text we find provisions that sometimes conflict with the provisional agreement of 30 June 2022.

Provisions that can hugely hinder the development of the cryptocurrency industry in Europe : unfair competition, integration of non-fungible tokens (NFT), integration of algorithmic stablecoins or even prohibition to offer interest in the context of services on stablecoins.

We will visit the hotspots of the MiCA regulations.

NFTs finally in the MiCA regulation?

According to the political agreement non-fungible tokens (NFT) were initially excluded from MiCAbut the new version of the leaked settlement would now include these assets.

While the draft rules still seem to consider that an NFT is not necessarily a digital asset, collections of NFTs, such as CryptoPunks or the Bored Ape Yacht Club, may fall within the scope of MiCA.

“Issuing crypto assets as non-fungible tokens in a large array or collection should be seen as an indicator of their fungibility. »

According to the Adan, the risk relates to: the interpretation of the term fungibility which can be more or less strict, depending on the qualification of a so-called large collection/series.

Another risk is the application of MiCA to split NFTs. In essence, even NFTs that were not originally thought to be split can. Many platforms allow owners of each NFT to break it down into subunits. In this case, if the holder of a single NFT of a collection of 10,000 copies decides to split it, will the entire collection be subject to MiCA?

A priori yesand as all NFTs are divisible, they are therefore all considered to be financial securities and therefore subject to the yoke of the MiCA regulation.

If we understand this last minute change, MiCA would consider certain non-fungible tokens as fungible assets… While this concept may seem vague, the fungibility of an asset is one element that makes it a financial security according to MiCA. And any asset related to a financial security is automatically included in the MiCA regulation.

👉 What is a non-fungible token? Our full explanation of NFTs

This has been one of the biggest fears of ecosystem players dealing with non-fungible tokens (NFTs). To learn more about the potential consequences of such a change, check out our discussion with these 2 French players in the NFT sector, Ownest and Arianee:

Algorithmic stablecoins also affected?

The cryptocurrency market is changing fast, very fast. An important event has not escaped the eyes of regulators: the collapse of the Terra (LUNA) ecosystem, and more specifically of its algorithmic stablecoin, the UST.

Lawmakers have observed the devastating effects of the fall of the stablecoin USTand aims to frame algorithmic stablecoins in the same way as centralized stablecoins such as Tether’s USDT and Circle’s USDC.

In the text, we learn that no matter how a crypto asset is stabilized, if it is backed by a currency or a basket of currencies and/or assets, it will be the target of regulation of stablecoins planned in MiCA.

Thereby, algorithmic stablecoins must be within the scope of MiCA. fall. At this point, the Adan specifies that:

“If there is too much centralization aspect to their operation, some decentralized stablecoin projects may be… could be requalified and approved by MiCA. »

Note that in the United States, algorithmic stablecoins are also in regulators’ crosshairs. Although it is only a bill at the moment, the House of Representatives wants to ban algorithmic stablecoins. Therefore, if this law is passed, stablecoins like TerraUSD would be banned for 2 years.

👉 Find our full file to understand what a stablecoin is

Other hard-to-understand metrics for NRPs

First of all, it should be remembered that in France digital asset service providers (PSAN) have to register and apply for authorization with the Autorité des marchés financiers (AMF).

Today, no company has PSAN approval, and the MiCA regulation is getting closer to accreditationwhich will most likely be required for currently registered PSANs.

Towards a ban on stablecoin lending?

Yes, as surprising as it may seem, the MiCA text would merely prohibit the PSAN companies that offer them services that reward users with stablecoins as the end.

The technical text does not translate the initial political vision of MiCA that authorized it.

Some PSANs are particularly concerned if such a provision actually appears in the final text of MiCA, as it is an important part of their activity.

The problem of reverse request (reverse request)

This is one of the PSANs’ biggest fears: the reverse request (passive marketing). If a person wishes to use the services of a foreign platform that does not comply with MiCA, he is authorized to do so if and only if this platform does not actively request him.

In fact, the power of European regulators with regard to players not based in Europe is quite limited, determining whether or not foreign players approach the customer is difficult.

It therefore seems that according to the leaked text, the reverse request will indeed be retained in the final MiCA regulations. With regard to the PSAN’s fears, Adan specifies:

“The PSANs opposed this provision because they believe there is a high risk of unfair competition. Because it is difficult to see whether foreign players are actively recruiting European customersand to act against them. »

A little positivity, but not for very long…

Good news for the ecosystem, decentralized finance (DeFi) appears to be excluded from MiCA. However, the Adan informs us that:

“The European Commission will prepare a report by 2024 on the regulatory treatment of DeFi and the feasibility of applying regulation to these protocols. »

Finally, the Adan adds that: the European Commission will prepare several reports to study the key challenges for the future of the crypto asset sector, and of course the regulatory ramifications that may come with it. In particular, this will cover DeFi, NFTs and sustainability issues.

Finally, it should be noted that the leaked text is not the final text. It is quite possible that the provisions set forth above are subject to changes which, we hope, will not further hinder our businesses in their development.

We would like to thank Adan for kindly answering our questions for creating this file..