Crypto industry figures welcomed, for the most part, the European Union’s (EU) landmark crypto law, the Markets in Crypto Assets (MiCA) regulation, agreed upon late Thursday. But the picture is more complicated when looking at the details, such as how the legislation treats particular digital assets.
The framework dedicates sizable sections to rules restricting the issuance and proliferation of stablecoins, which are cryptocurrencies tethered to the value of real assets like the U.S. dollar or the euro.
The rules, intended to offer regulatory certainty to the growing industry, still have many scratching their heads over paradoxes – such as whether a non-fungible token (NFT) can become fungible and interchangeable with other identical assets in the same way as securities.
For some, the immediate reaction to the announcement of a deal was relief that the nearly two years of haggling was finally over. Lawmaker Aurore Lalucq celebrated the milestone with a tweet citing Disney’s song “Let It Go” (in French, known as “Freed! Released!”).
Others jumped straight to the substance of a law that represents a significant first for such a large jurisdiction.
“This landmark regulation will put an end to the crypto wild west and confirms the EU’s role as a standard setter for digital topics,” said France Finance Minister Bruno Le Maire in an emailed statement. Le Maire was responsible for chairing intergovernmental talks on the law for the last six months.
On the map
In the crypto community, many appear to agree with at least the latter part of Le Maire’s sentiment.
“This framework has helped put the region on the map as an early and important leader in defining the regulatory environment. It will shape the digital asset ecosystem for years to come,” said Sheila Warren of the Crypto Council for Innovation in an emailed statement.
The analogy is often made with the EU’s General Data Protection Regulation (GDPR), setting out what companies can do with personal information. It has not always been popular, and at least initially meant some U.S. websites had to block their content in Europe – but proponents argue it gave the EU big influence over how to protect online privacy worldwide.
Plus, Warren said, the new crypto law mostly avoids stifling innovation – and indeed may prove a net positive.
“Legal and regulatory certainty for the market will enable more crypto firms to invest and innovate across the region,” she said. “It is an encouraging development.”
Marina Markezic, a founder and executive director of lobby group the European Crypto Initiative, said the deal was an “achievement” that will make life easier for companies.
“This is very good for the whole EU market in general just to have a unified regulation,” she told CoinDesk. “Until now, every different [EU] member state has their own regulation, or they didn't have anything, so it was very hard for different companies and projects to be present and offer their services in the whole market.”
As to how the negotiations finally panned out, “the worst case scenario didn't happen,” she said. She points to an attempt to limit the energy-intensive proof-of-work mining that, in the end, never came to pass.
Pending a final text, she also thinks she’s happy with the result on NFTs – previously a major area of concern.
“NFTs are excluded, and they are also defined in a way that more or less defines the actual facts of how NFTs do function in the industry,” Markezic said.
Lawmakers were keen to ensure the rapidly-evolving NFT market was included in the law, as regulation could offer guarantees for buyers and sellers who often get on the wrong end of manipulative pricing practices. Yet, not all are quite so happy with the final result.
Lobby group Blockchain for Europe shares the enthusiasm for the legal certainty the new law brings. CEO Robert Kopitsch said rules for crypto asset service providers such as exchanges and wallets are “savvy,” and that the law will let decentralized finance (DeFi) prosper.
But, he added, it’s “overall a mixed bag, and we are still out there to count the casualties.”
Meanwhile, conventional investment banks, a heavily regulated sector that doesn’t want to get undercut by more lightly overseen crypto firms, also seem to appreciate the balance struck.
“AFME welcomes the pragmatic approach taken to include decentralized autonomous organizations (DAO) and non-fungible tokens (NFT),” James Kemp, managing director at the Association for Financial Markets in Europe, said in an emailed statement.
Excluding NFTs altogether, or the DAOs that often underpin decentralized finance, could have harmed investors and financial stability, AFME argued.
In part the mixed response is due to confusion over exactly what the law says: No text is yet available.
In principle, the law excludes NFTs – but in practice, a French finance ministry source told CoinDesk, only as long as they do what they promise.
“If a non-fungible token becomes fungible, then it will fall into” either MiCA, or other EU laws governing conventional financial instruments, said the source, who asked not to be named. In reality, another source has told CoinDesk, last-minute drafting changes may mean that the law may apply to any NFT that is part of a series and able to be divided up – or “fractionable,” in legal jargon.
That kind of NFT might be most concerning to policymakers because it most resembles regulated securities, but the wording has raised alarm.
“If this is the final draft, and the word ‘fractionable’ is used, that is a concern because from the technical point of view most of the NFTs are fractionable,” said Markeciz. “Maybe the word ‘fractionalized’ would be better.”
If it implies the law extends to cover all collectibles, that would be a “sheer joke,” Kopitsch said, with creators having to prepare multiple white papers informing buyers about their artworks.
Another major focus of the bill is stablecoins – with rules intended to ensure good governance and financial stability that were originally a response to Facebook’s now-aborted Libra project, and gained still more momentum after the dramatic collapse of the terraUSD algorithmic stablecoin.
One of the most eye-catching measures would be a cap, which means stablecoins that aren’t tied to a single fiat currency would have to stop issuing if daily transactions exceed 200 million euros ($209 million) – intended to stop private companies usurping the role of the euro.
For some, like Kene Ezeji-Okoye, CEO of U.K.-based stablecoin issuer Millicent, that’s an “arbitrary restriction,” and an example of the law discriminating against a means of payment because of the technology it uses.
“Given that the top four stablecoins in the market currently significantly exceed this volume, this could be a barrier to stablecoins becoming widespread in the EU, which would be a shame given their many benefits of other means of transacting,” he said.
Markezic also noted that, in practice, it will be impossible for decentralized stablecoins – those that don’t have a single identifiable issuer – to comply with the rules that in practice oblige a central entity to take charge. Decentralized stablecoin DAI is the fourth-largest stablecoin by market capitalization.
Other restrictions in the law, like ban on interest payments for users, and heavy restrictions on how reserves can be invested, have led some to ask if there will ever be an incentive for stablecoin issuers, and the DeFi ecosystem they bring with them, to set up in Europe at all.
U.S. companies are already taking advantage by issuing stablecoins in the EU’s own currency, the euro, French crypto lobbyists ADAN noted, in a likely reference to recent announcements by USD coin issuer Circle. The advocacy group warned that more complex and rigid legislation would only make that situation worse.
To strike the provisional deal, governments, grouped in the Council of the EU, had to agree on a text jointly with the European Parliament.
The final session talks where they did so ran on for nearly seven hours, culminating in head-to-head private discussions between lead negotiators Philippe Léglise-Costa, a French diplomat representing the Council, and Irene Tinagli, the Italian lawmaker who chairs the parliament’s Economic and Monetary Affairs Committee.
Talks concluded just a few hours before France would have had to cede control to the Czech Republic, which took over chairmanship of the Council as of July 1.
One of the most heated issues in those final talks appears to have been on whether national regulators, or EU agencies responsible for banking or securities markets should get to supervise crypto firms. The dispute over which agency gets supervisory authority is mirrored in the U.S. between the U.S. Securities and Exchange and Commodity Futures Trading Commissions. But such squabbles over territory may not be such a big deal from the industry’s perspective, Markezic said.
“It's less substantive” than other issues on her radar, she said. “What matters to the European community is that there is going to be a unified way of how they're going to be reviewed by the regulators,” and that those regulators have the right crypto expertise.
The agreement caps a big week for crypto in the EU, hot on the heels of a deal to impose anti-money laundering rules on the sector. The EU’s intent will be that, with the package of two laws in hand, it can set itself out as a natural home for sound crypto businesses.
Others may look at the many near misses during the talks – which at times came dangerously close to restricting bitcoin (BTC) mining, attempting to centralize DeFi, and imposing identity checks on self-hosted crypto wallets – and ask if that’s the kind of regulatory certainty the industry needs.
Camomile Shumba contributed reporting.