MiCA is a proposed regulatory scheme for European crypto-assets which creates a framework for the issuance, offer and admission to trading of crypto-assets, including transparency requirements. It also introduces important licensing requirements and measures to prevent market abuse. The regulation defines the term “crypto asset” broadly, conceptualising it as a digital representation of value or rights that can be transferred or stored electronically using things like distributed ledger technology.
According to the European Commission, there are four objectives that the legislation is trying to achieve: promoting legal certainty, supporting innovation, instilling appropriate levels of consumer and investor protection, and ensuring financial stability. Despite coming into force in June 2023, the MiCA regulation will not achieve these objectives until all its Titles come into full effect in December 2024, at which point it will have gone through three public consultations.
Crypto assets covered by MiCA
According to Title I of the regulation, MiCA affects entities engaged in issuing crypto-assets within the EU or providing services related to crypto-assets. This means that MiCA affects issuers and crypto-asset service providers (CASPs). MiCA defines issuers of crypto-assets as legal persons who offer to the public any crypto-assets or seek the admission of the asset to a trading platform. CASPs differ in that, to qualify, the person must, on a professional basis, provide one or more crypto-asset services to third parties as a business.
If an individual or organisation issuing crypto-assets falls within the scope of MiCA, they must be incorporated into the EU as a legal entity and publish a white paper, notifying the existence of the white paper to the competent authority. The white paper must contain information such as a detailed description of the crypto project, the reasons why the assets are being offered, the characteristics of the assets, and the risks relating to the issuer and assets themselves, among many other things that are intended to help investors make more informed decisions.
A CASP must be a legal person with a registered office in a Member State of the EU, which has been authorised by the competent authority. Title V of the regulation sets out an extensive list of obligations that affect all CASPs. To name a few, CASPs are required to act honestly, fairly, and professionally in the best interest of clients; they must disclose information about their assets in a white paper; and they are required to maintain prudential safeguards.
Crypto-assets not covered by MiCA
MiCA does not apply to crypto-assets classified under existing legal frameworks, such as Directive 2014/65/EU (Financial Instrument Directive) and Directive 2009/110/EC (Electronic Money Directive). The regulation also does not apply to unique NFTs. NFTs are digital assets with a unique identifier that exists in the blockchain and cannot be replicated. Whilst they are generally excluded from the scope of MiCA if a fractional part of the NFT is considered fungible or the crypto-asset being issued as an NFT is part of a larger collection, this will be considered as an indicator of the asset’s fungibility, making it fall within the framework of the regulation. To be excluded from the regulation, an NFT must, therefore, be unique (non-replicable) and non-fungible (incapable of being replaced with another identical asset).
Benefits of NFTs falling within the scope of MiCA
By excluding only unique and non-fungible NFTs from MiCA, the regulation helps secure the crypto market. This additional criterion ensures that a fungible crypto-asset cannot be disguised as an NFT, which would otherwise allow the asset to bypass the legal and prudential requirements that other crypto-assets are subject to. By holding all fungible crypto-assets to the same standard, the MiCA regulation prevents certain assets from gaining an unfair competitive advantage and protects investors by ensuring asset transparency through requirements like the publication of a white paper.
Problems with NFTs falling within the scope of MiCA
A case can be made that treating certain NFTs as fungible assets can be problematic. If an NFT can be categorised as one of the existing crypto-assets defined in MiCA, the asset’s issuer will be required to publish a white paper. The problem with this is that a white paper is a long and highly detailed document, which can be unfeasible for an issuer to put together following the creation of every single NFT. In other words, this requirement introduces excessive bureaucracy into the market. The same issue is visible in relation to NFT providers, who face considerable red tape because of the requirement for them to be authorised by a regulatory body to be considered a CASP.
The content of this information does not constitute any specific legal advice; the latter can only be given when faced with a specific case. Please contact us for any further clarification or information deemed necessary in what concerns the application of the law.