In May the European Commission opened a consultation on updating Europe’s crypto regulation, MiCA. One of the important questions was whether MiCA should cover distributed ledger-based financial instruments currently governed by MiFID, MiFIR and the Prospectus Regulation. That would be a radical shift that many would argue is not technology neutral. In its consultation response, the Association for Financial Markets in Europe (AFME) came out strongly against bringing tokenized securities under the MiCA umbrella. AFME also expressed support for multi-issuance stablecoins, called for changes in stablecoin concentration limits, and asked for confirmation that tokenized deposits are governed by the existing banking framework.
Regarding MiCA and MiFID, AFME argued that such a change would result in “significant legal uncertainty, costs, and negative consequences on market functioning (including liquidity, hedging, and collateral eligibility)”. They have a point. That’s especially because one of the instruments of greatest overlap between the two regulatory environments is so-called asset-referenced tokens (ARTs), particularly the line between an ART and a tokenized money market fund. If there were dozens of confusing ARTs in issuance, there might be a concern. But we’d observe that there have been zero ARTs authorized so far, which makes upending legislation seem like an extreme step.
In its consultation response, the European Banking Authority (EBA) was also emphatic about keeping tokenized securities under MiFID and even raised the question of whether ARTs should be folded into the definition of financial instrument. The EBA said regulating DLT-based securities under MiCA could create issues regarding regulated activity authorizations for banks, whether tokenized securities would be eligible as financial collateral, the application of the Basel prudential framework, and interactions with accounting rules.
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