On 16 September 2020, Politico published a leaked version of the European Commission (EC) ‘s draft legislation on Markets in Crypto-Assets (MiCA). This proposal aims to create a regulatory framework to enable the crypto-asset market, traditional financial asset tokenization, and the use of distributed ledger technology (DLT) in the financial services sector.
In addition to MiCA, the EU is considering amending existing legislation that currently obstructs DLT. For stablecoins in particular, a bespoke legislative framework is to be considered, as well as potential regulation under the existing Electronic Money Directive (EMD).
A very quick observation is that some of these draft MiCA rules have not considered Decentralized Finance (DeFi). The 168-page document doesn’t reference ‘decentralized’ at all. For example, tokens that are issued free seem to be largely exempted. But since June, just four ‘free’ DeFi tokens have been issued with a combined current market capitalization north of $2.5 billion. There is some risk for their secondary market investors. And as you’ll see, we suspect that the regulations won’t cover most of the decentralized exchanges, which are essentially automated smart contracts.
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